<PAGE>
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SJS BANCORP, INC.
(Name of Registrant as Specified in its Charter)
____________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK, $0.01 PAR VALUE, OF SJS BANCORP, INC.
-----------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
997,131
-----------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$27
-----------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$26,922,537
-----------------------------------------------------------------
<PAGE>
(5) Total fee paid:
$5,385
-----------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by Registration
Statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------
-2-
<PAGE>
[SJS Letterhead]
January ___, 1997
Dear Fellow Stockholder:
On behalf of the Board of Directors and the management of SJS
Bancorp, Inc., I am very pleased to invite you to attend a special meeting
of the stockholders of SJS, to be held at __:00 a.m. local time, on
February ___, 1997, at the ____________________________________________
___________, Michigan.
The purpose of the Special Meeting is to consider and vote on a
proposal to adopt the Agreement and Plan of Merger, dated November 6, 1996,
between SJS, Shoreline Financial Corporation, and SJS Acquisition
Corporation. Under the Merger Agreement, SJS would become a wholly owned
subsidiary of Shoreline.
After the Merger, you will be entitled to receive $27 in cash for
each share of SJS Common Stock you own.
YOUR BOARD OF DIRECTORS HAS APPROVED THE AGREEMENT AND PLAN OF
MERGER, BELIEVES IT IS IN THE BEST INTERESTS OF SJS AND ITS STOCKHOLDERS,
AND RECOMMENDS THAT YOU VOTE FOR ITS APPROVAL.
WE ENCOURAGE YOU TO ATTEND THE SPECIAL MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND, HOWEVER, PLEASE SIGN AND DATE THE
ENCLOSED PROXY PROMPTLY.
Sincerely,
[signature]
Thomas G. Watson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
SJS BANCORP, INC.
301 State Street
St. Joseph, Michigan 49085
(616) 983-0134
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Shareholders of SJS Bancorp, Inc.:
A special meeting (the "Meeting") of stockholders of SJS Bancorp, Inc.
("SJS") will be held at __________________________________________________
______________________, Michigan at __:00 a.m. local time, on February ___,
1997.
A proxy card and proxy statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The adoption of an Agreement and Plan of Merger, dated
November 6, 1996 (the "Merger Agreement"), between SJS, Shoreline Financial
Corporation, and SJS Acquisition Corporation in substantially the form set
forth in Appendix A to the accompanying Proxy Statement, and approval of
the transactions contemplated by the Merger Agreement.
2. Such other matters as may properly come before the Meeting.
The Board of Directors of SJS has fixed the close of business on
January ___, 1997, as the record date for determination of stockholders
entitled to notice of and to vote at the meeting and any adjournment of the
meeting.
Appraisal rights are available for any and all shares of SJS.
The right of any stockholder to participate in the statutory appraisal
process is contingent upon strict compliance with the procedures and time
periods set forth in Section 262 of the Delaware General Corporation Law, a
copy of which is attached as Appendix B to the accompanying Proxy
Statement.
BY ORDER OF THE BOARD OF DIRECTORS
[signature]
Thomas G. Watson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
St. Joseph, Michigan
January ___, 1997
<PAGE>
YOUR VOTE IS IMPORTANT. EVEN IF YOU PLAN TO ATTEND THE SPECIAL
MEETING, PLEASE SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY TO ENSURE YOUR VOTE IS COUNTED.
<PAGE>
TABLE OF CONTENTS
INTRODUCTION AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Parties to the Merger . . . . . . . . . . . . . . . . . . . . . . . 2
Summary of Certain Aspects of the Merger. . . . . . . . . . . . . . 2
Market and Dividend Information . . . . . . . . . . . . . . . . . . 3
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 4
Selected Per Share Data . . . . . . . . . . . . . . . . . . . . . . 5
GENERAL MEETING INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 5
Time and Date; Record Date. . . . . . . . . . . . . . . . . . . . . 5
Matters to be Considered. . . . . . . . . . . . . . . . . . . . . . 6
Voting By Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Proxy Solicitation. . . . . . . . . . . . . . . . . . . . . . . . . 6
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Appraisal Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Proposals For Annual Meeting. . . . . . . . . . . . . . . . . . . . 7
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Background of the Merger. . . . . . . . . . . . . . . . . . . . . . 8
Reasons for and the Recommendation of the Merger. . . . . . . . . . 10
Opinion of Financial Advisor. . . . . . . . . . . . . . . . . . . . 11
Consideration to be Received. . . . . . . . . . . . . . . . . . . . 14
SJS's Incentive Plan and Stock Options. . . . . . . . . . . . . . . 15
Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Payment for Shares. . . . . . . . . . . . . . . . . . . . . . . . . 15
Conditions Precedent to the Merger and the Possible Termination
of the Merger Agreement . . . . . . . . . . . . . . . . . . . . . . 15
Business of SJS Pending the Merger. . . . . . . . . . . . . . . . . 19
Consolidation of the Bank . . . . . . . . . . . . . . . . . . . . . 19
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 20
Material Agreements Relating to the Merger and Interests of
Certain Persons . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Treatment of the ESOP . . . . . . . . . . . . . . . . . . . . . . . 20
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . 21
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . 22
SJS BANCORP, INC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Description of the Business . . . . . . . . . . . . . . . . . . . . 22
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Description of Properties . . . . . . . . . . . . . . . . . . . . . 50
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 50
Beneficial Ownership of Certain Persons . . . . . . . . . . . . . . 51
-1-
<PAGE>
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Incorporation by Reference. . . . . . . . . . . . . . . . . . . . . 54
Independent Public Accountants. . . . . . . . . . . . . . . . . . . 54
Sources of Information. . . . . . . . . . . . . . . . . . . . . . . 54
APPENDICES
Agreement and Plan of Merger. . . . . . . . . . . . . . . . . . . .A-1
Section 262 of the Delaware Law . . . . . . . . . . . . . . . . . .B-1
Opinion of The Chicago Corporation. . . . . . . . . . . . . . . . .C-1
Financial Statements as of and for periods ended June 30, 1996,
and Management's Discussion and Analysis. . . . . . . . . . . . . .D-1
Financial Statements as of and for periods ended September 30,
1996, and Management's Discussion and Analysis. . . . . . . . . . .E-1
-2-
<PAGE>
PROXY STATEMENT
SJS BANCORP, INC.
301 State Street
St. Joseph, Michigan 49085
(616) 983-0134
SPECIAL MEETING OF STOCKHOLDERS
February ___, 1997
TO CONSIDER A PROPOSED MERGER INVOLVING
SHORELINE FINANCIAL CORPORATION
PROVIDING CONSIDERATION OF
$27 PER SHARE, CASH
TO SJS STOCKHOLDERS
INTRODUCTION AND SUMMARY
The following introduction and summary should be considered in
conjunction with the more detailed information appearing elsewhere in this
Proxy Statement.
INTRODUCTION
This Proxy Statement, which is first being sent on or about
January ___, 1997, is furnished to the holders of record on January ___,
1997 (the "Record Date"), of shares of common stock of SJS Bancorp, Inc.
("SJS"), $0.01 par value ("SJS Common Stock"), in connection with a
solicitation on behalf of the Board of Directors of SJS of proxies to be
voted at the special meeting of stockholders of SJS to be held on February
___, 1997 (the "Special Meeting"). The purpose of the Special Meeting is
to consider and vote upon adoption of an Agreement and Plan of Merger,
dated November 6, 1996 (the "Merger Agreement"), between SJS, Shoreline
Financial Corporation, a Michigan corporation ("Shoreline"), and SJS
Acquisition Corporation, a Michigan corporation (the "MergerSub"), in
substantially the form set forth in Appendix A to this Proxy Statement.
As a result of the merger contemplated by the Merger Agreement
(the "Merger"), SJS will become a wholly owned subsidiary of Shoreline.
Following the Merger, SJS Federal Savings Bank (the "Bank") will be merged
with and into Shoreline Bank and SJS will be dissolved. The stockholders
of SJS at the effective time of the Merger (other than the stockholders who
have properly exercised appraisal rights under the Delaware General
Corporation Law (the "Delaware Law")) will be entitled to receive $27 in
cash for each share of SJS Common Stock (See "THE MERGER -- Consideration
to be Received" below). After the Merger, SJS stockholders will have no
continuing stockholder relationship with SJS, Shoreline, or MergerSub.
<PAGE>
YOUR BOARD OF DIRECTORS RECOMMENDS THAT SJS STOCKHOLDERS
VOTE FOR ADOPTION OF THE AGREEMENT AND PLAN OF MERGER.
PARTIES TO THE MERGER
SJS BANCORP, INC. SJS Bancorp, Inc. is a Delaware corporation
that was organized in 1994 by the Bank for the purpose of becoming the
savings and loan holding company of the Bank. SJS owns all of the
outstanding stock of the Bank issued on February 15, 1995 in connection
with the Bank's conversion from the mutual to the stock form of
organization. The Bank, SJS's only operating subsidiary, was originally
chartered under the laws of the state of Michigan in 1916 as St. Joseph
Building and Loan Association and converted to a federally chartered mutual
savings and loan association in 1985. In 1988, the Bank amended its
charter to become a federal savings bank under its current name. (See "SJS
BANCORP" below).
The principal executive offices of SJS are located at 301 State
Street, St. Joseph, Michigan 49085. The telephone number at that address
is (616) 983-0134.
SHORELINE FINANCIAL CORPORATION AND SJS ACQUISITION CORPORATION.
Shoreline Financial Corporation is a bank holding company headquartered at
823 Riverview Dr., Benton Harbor, Michigan, 49023, (616) 927-2251.
Shoreline, as of September 30, 1996, had consolidated assets of $708
million, deposits of $615 million, and shareholders' equity of $67 million.
Shoreline's business is concentrated exclusively in the commercial banking
industry segment. Shoreline Bank, Shoreline's wholly owned subsidiary,
offers individuals, businesses, institutions and government agencies a full
range of commercial banking services.
The principal markets for Shoreline's financial services are the
Southwestern Michigan communities in which Shoreline Bank offices are
located and the areas immediately surrounding these communities. Shoreline
and Shoreline Bank serve these markets through 13 offices located in and
around these communities. Shoreline and Shoreline Bank employed
approximately 320 persons as of December 31, 1995.
SJS Acquisition Corporation ("MergerSub") is a Michigan
corporation that is wholly owned by Shoreline. MergerSub was formed
specifically for the purpose of the acquisition of SJS by Shoreline and has
the same address as Shoreline.
SUMMARY OF CERTAIN ASPECTS OF THE MERGER
DIRECTORS' APPROVAL AND RECOMMENDATION OF THE MERGER. At a Board
of Directors meeting held on November 6, 1996, after considering the terms
and conditions of the Merger Agreement and obtaining the advice of its
-2-
<PAGE>
financial advisor, the SJS Board of Directors unanimously approved the
Merger Agreement. The SJS Board of Directors believes that the
consideration offered pursuant to the transaction is fair to the
stockholders of SJS and, accordingly, recommends that stockholders of SJS
vote "FOR" approval of the Merger Agreement. (For a discussion of the
circumstances surrounding the Merger and the factors considered by the SJS
Board of Directors in making its recommendation, see "THE MERGER --
Background of the Merger" and "--Reasons for and the Recommendation of the
Merger").
Certain members of SJS's management and SJS Board of Directors
have certain interests in the Merger that are in addition to their
interests as stockholders of SJS generally. (See "THE MERGER -- Material
Agreements Relating to the Merger and Interests of Certain Persons").
CONSIDERATION TO BE RECEIVED IN THE MERGER. The stockholders of
SJS on the effective date of the Merger (other than the stockholders who
have properly exercised appraisal rights under the Delaware Law) will
become entitled to receive $27 in cash for each share of SJS Common Stock
(See "THE MERGER -- Consideration to be Received" below). SJS stockholders
will have no continuing stockholder relationship with SJS, Shoreline, or
MergerSub.
OPINION OF FINANCIAL ADVISER. SJS's financial adviser, The
Chicago Corporation, has rendered an opinion to SJS's board of directors,
dated as of November 6, 1996, to the effect that (as of such date) the
consideration to be received in the Merger is fair to SJS stockholders from
a financial point of view. This opinion is attached in full as Appendix C
to this Proxy Statement. SJS stockholders are urged to read that opinion
in its entirety for a description of the procedures followed, assumptions
made, matters considered, and qualifications on the review undertaken by
The Chicago Corporation (See "THE MERGER -- Opinion of Financial Adviser"
below).
VOTE REQUIRED. The affirmative vote of the holders of a majority
of the outstanding shares of SJS Common Stock entitled to vote as of the
Record Date is required to adopt the Merger Agreement. As of the Record
Date, SJS's directors and executive officers and their affiliates
beneficially owned ___ percent of the outstanding SJS Common Stock. As of
the Record Date, Shoreline's directors and executive officers and their
affiliates held 1,750 shares/___ percent of the outstanding SJS Common
Stock. No vote of the shareholders of Shoreline is required to adopt the
Merger Agreement (See "GENERAL MEETING INFORMATION" below).
APPRAISAL RIGHTS. Holders of SJS Common Stock are entitled to
statutory rights of appraisal pursuant to Section 262 of the Delaware Law
(See "GENERAL MEETING INFORMATION -- Appraisal Rights" below).
-3-
<PAGE>
REGULATORY APPROVALS. Consummation of the Merger is subject to
approval of the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") and the Office of Thrift Supervision ("OTS") (collectively,
the "Regulatory Approvals"). The Merger may not be consummated for a
period of 30 days after receipt of the Federal Reserve Board's final
approval unless the Federal Reserve Board has not received any adverse
comment from the United States Department of Justice during the first 15
days following final approval, in which case the Merger may be consummated
on or after the 15th day after final approval by the Federal Reserve Board.
(See "THE MERGER -- Regulatory Approvals" below).
TERMINATION FEE. SJS must pay Shoreline a termination fee of
$2,000,000 if Shoreline's Board of Directors terminates the Merger
Agreement as a result of (i) a third party making an Acquisition Proposal
(as defined below), (ii) the SJS Board of Directors changes its
recommendation of the Merger, or (iii) a third party acquires a certain
amount of control over SJS. In addition, SJS and Shoreline each have
obligations to pay the other $750,000 upon termination of the Merger as a
result of certain events caused by the other. (See "THE MERGER --
Conditions Precedent to the Merger and Possible Termination of the Merger
Agreement" below).
MARKET AND DIVIDEND INFORMATION
SJS Common Stock is traded on The Nasdaq SmallCap Market. SJS
Common Stock was held of record by __________ shareholders as of the Record
Date. The following table sets forth, from SJS's inception in February
1995 to present, the range of high and low closing prices, as reported by
the Nasdaq Stock Market. The quotations reported in the following table
reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not reflect actual transactions. The table also shows
dividends declared, by quarter, from February 1995 to present.
-4-
<PAGE>
<TABLE>
<CAPTION>
CLOSING PRICE
------------------- DIVIDENDS
QUARTER-ENDED HIGH LOW DECLARED
- ------------- ---- --- ---------
<S> <C> <C> <C>
1995
- ----
March 31 $11.75 $10.75 $ --
June 30 15.25 11.75 --
September 30 18.25 14.75 .10
December 31 19.75 18.00 .10
1996
- ----
March 31 $20.25 $18.50 $ .10
June 30 20.75 18.50 .10
September 30 21.50 19.75 .11
December 31 25.88 20.75
-------
</TABLE>
OTS regulations impose various restrictions or requirements on the ability
of the Bank to pay dividends. (See "SJS BANCORP, INC.--Description of
Business -- Regulation - Limitation on Dividends and on Other Capital
Distributions" below).
On November 6, 1996, the day preceding the public announcement of
the Merger, SJS Common Stock traded at $22.75. If the Merger is adopted by
the SJS stockholders and the closing occurs, SJS stockholders as of the
Effective Time will be entitled to receive $27 per share.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following financial data does not purport to be complete and
is qualified in its entirety by reference to the more detailed financial
information contained elsewhere herein. In the opinion of SJS management,
all adjustments necessary for a fair presentation of such financial data
have been included. All such adjustments are of a normal recurring nature.
-5-
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets. . . . . . . . . . . . $151,897 $129,513 $118,719 $127,366 $130,627
Loans, net. . . . . . . . . . . . . 98,862 71,818 52,538 50,237 48,127
Interest-earning deposits . . . . . 190 190 190 387 1,278
Mortgage-backed securities. . . . . 36,211 36,065 42,336 60,615 63,876
Investment securities . . . . . . . 9,298 14,027 11,842 6,304 4,810
Deposits. . . . . . . . . . . . . . 107,928 106,294 108,847 108,387 109,092
Long-term borrowings. . . . . . . . 23,750 0 0 7,033 11,220
Total retained earnings -
substantially restricted. . . . . 16,910 17,017 7,591 8,986 7,574
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income . . . . . . . . . . . . $10,428 $8,488 $7,822 $8,977 $10,799
Total interest expense. . . . . . . . . . . . 6,465 4,993 5,316 6,262 8,070
Net interest income . . . . . . . . . . . . . 3,963 3,495 2,506 2,715 2,729
Provision (credit) for loan losses. . . . . . 175 (38) (48) (48) (15)
Net interest income after provision
(credit) for loan losses. . . . . . . . . . 3,788 3,533 2,554 2,763 2,744
Fees and service charges. . . . . . . . . . . 431 352 348 314 307
Gain on sales of loans, mortgage-backed
securities and investment securities. . . . 15 7 482 806 521
Other noninterest income. . . . . . . . . . . 110 85 72 65 86
Total noninterest income. . . . . . . . . . . 556 444 902 1,185 914
Total noninterest expense . . . . . . . . . . 3,239 3,000 2,852 2,774 2,739
Income before Federal income tax
expense and extraordinary item. . . . . . . 1,105 977 604 1,174 919
Federal income tax expense. . . . . . . . . . 262 288 220 353 249
Income before extraordinary item. . . . . . . 843 689 384 821 670
Debt extinguishment premium, net of tax . . . 0 0 (307) 0 0
Net income. . . . . . . . . . . . . . . . . . $ 843 $ 689 $ 77 $ 821 $ 670
-6-
<PAGE>
Earnings per common and
common equivalent share <F1>. . . . . . . . $ 0.91 $ 0.38 N/A N/A N/A
Earnings per common share - assuming
full dilution <F1> . . . . . . . . . . . . $ 0.91 $ 0.38 N/A N/A N/A
___________________________
<FN>
<F1> Subsequent to the Bank's conversion from mutual to stock form on
February 15, 1995. (See Note 2 of the Consolidated Financial Statements in
Appendix D.)
</FN>
</TABLE>
SELECTED PER SHARE DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED PERIOD ENDED
JUNE 30, 1996 SEPT. 30, 1996
------------- --------------
<S> <C> <C>
Book Value Per Share $_________ $________
Dividend Per Share $_________ $________
Net Income (Loss) Per Share $_________ $________
</TABLE>
GENERAL MEETING INFORMATION
TIME AND DATE; RECORD DATE
The Special Meeting will be held on February ___, 1997, at ___
a.m., local time, at ___________________________________________________
_________, Michigan. The Board of Directors of SJS has fixed January ___,
1997, as the Record Date. Only stockholders of record of SJS Common Stock
at the close of business on the Record Date are entitled to notice of and
to vote at the Special Meeting. As of the Record Date, there were 917,622
shares SJS Common Stock outstanding and entitled to be voted at the Special
Meeting.
MATTERS TO BE CONSIDERED
At the Special Meeting, the holders of SJS Common Stock will be
asked to adopt the Merger Agreement.
VOTING BY PROXY
If a SJS stockholder properly executes and returns a proxy in the
form distributed by SJS, the proxies named will vote the shares represented
-7-
<PAGE>
by that proxy at the Special Meeting. Where a stockholder specifies a
choice, the proxy will be voted in accordance with the stockholder's
specification. If no specific direction is given, the proxies will vote
the shares in favor of adoption of the Merger Agreement. If other matters
are presented, the shares for which proxies have been received will be
voted in accordance with the discretion of the proxies.
A stockholder may revoke a proxy by: (i) filing with the
Secretary of SJS at or before the Special Meeting a written notice of
revocation bearing a later date than the proxy, (ii) duly executing a
subsequent proxy relating to the same shares and delivering it to the
Secretary of SJS at or before the Special Meeting, or (iii) attending the
Special Meeting and voting in person (although attendance at the Meeting
will not in and of itself constitute revocation of a proxy). Any written
notice revoking a proxy should be delivered to Irma R. Wedde, Senior Vice
President and Secretary, SJS Bancorp, Inc., 301 State Street, St. Joseph,
Michigan 49085.
PROXY SOLICITATION
The board of directors, officers, and employees of SJS will
initially solicit proxies by mail. If they deem it advisable, directors,
officers, and employees of SJS may also solicit proxies in person by
telephone or by other forms of communication without additional
compensation, except for reimbursement of reasonable out-of-pocket expenses
incurred in connection with such solicitation. In addition, nominees and
other fiduciaries may also solicit proxies. Such persons may, at the
request of SJS's management, mail material to or otherwise communicate with
the beneficial owners of shares held by them. Although it does not
presently plan to do so, SJS's management may request that directors,
officers, and employees of Shoreline and its subsidiaries assist in the
proxy solicitation. If management makes such a request, such persons may
also solicit proxies of SJS stockholders by mail, telephone, and personal
interview without additional compensation, except for reimbursement of
reasonable out-of-pocket expenses incurred in connection with such
solicitation. All expenses of solicitation of proxies will be paid by SJS.
VOTING RIGHTS
Each holder of record of SJS Common Stock on the Record Date will
be entitled to one vote for each share registered in his, her, or its name
on each matter presented for a vote of the stockholders at the Special
Meeting. The Merger must be approved by the affirmative vote of the
holders of a majority of the shares of SJS Common Stock outstanding as of
the Record Date. For the purpose of counting votes on this proposal,
failures to vote, abstentions and broker non-votes will have the same
effect as votes against approval of the Merger Agreement.
-8-
<PAGE>
EXPENSES
SJS will pay all expenses associated with printing and mailing
this Proxy Statement. Except in the case of certain breaches of the Merger
Agreement by Shoreline or SJS, if the Merger Agreement is terminated before
the Merger becomes effective, Shoreline and SJS each will pay its own fees
and expenses incident to preparing for, entering into and carrying out the
Merger Agreement and procuring any necessary approvals, including fees and
expenses of its own legal counsel, accountants and other experts. (See
"THE MERGER -- Conditions Precedent to the Merger and Possible Termination
of the Merger Agreement" below).
APPRAISAL RIGHTS
Pursuant to Section 262 of the Delaware Law (a copy of which is
attached hereto as Appendix B), a holder of SJS Common Stock who complies
with the statutory provisions thereof will be entitled to an appraisal by
the Delaware Court of Chancery of the fair value of his or her SJS Common
Stock and to receive payment of such amount in lieu of $27 per share in
cash provided for in the Merger Agreement. Such amount may be more or less
than $27 per share. Any holder of SJS Common Stock desiring to exercise
rights of appraisal should refer to the statute in its entirety and should
consult with legal counsel prior to taking any action to ensure that such
holder complies strictly with the applicable statutory provisions.
To exercise appraisal rights, a holder of SJS Common Stock must:
(i) hold shares of SJS Common Stock on the date of the making of
a demand for appraisal of such shares and continuously hold such
shares through the effective time of the Merger;
(ii) deliver to SJS written demand for appraisal of his or her
shares before the vote on the Merger is taken; and
(iii) not have voted in favor of the Merger.
All former SJS stockholders entitled to appraisal rights will be
notified of the Merger within 10 days after the Effective Time (as defined
below). Within 120 days after the Effective Time, any stockholder who has
met such requirements, or SJS, may file a petition with the Delaware Court
of Chancery seeking a determination of the value of the stock of all such
stockholders. The Court of Chancery must hold a hearing and determine the
fair value (exclusive of any element of value arising from the Merger),
together with a fair rate of interest to be paid on the fair value. SJS
(or its successor) will pay the fair value of the stock held by
stockholders seeking appraisal and the interest determined by the Court.
Notwithstanding the foregoing, at any time within 60 days after the
Effective Time, any stockholder will have the right to withdraw his or her
demand for appraisal rights and accept the terms offered in the Merger.
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The failure of a holder of SJS Common Stock to vote against the
proposal to adopt the Merger Agreement will not constitute a waiver of such
holder's appraisal rights under the Delaware Law. A vote against adoption
of the Merger Agreement will not satisfy the obligation of a stockholder
seeking an appraisal to give notice pursuant to Section 262 of the Delaware
Law.
PROPOSALS FOR ANNUAL MEETING
In the event that SJS stockholders approve the Merger Agreement
and the Merger is consummated, there will be no annual meeting of SJS
stockholders following SJS's current fiscal year. If the Merger is not
consummated, proposals of SJS's stockholders intended to be presented at
the annual meeting of stockholders in 1997 must be received by SJS for
consideration for inclusion in its proxy statement and form of proxy
relating to that meeting before June 2, 1997.
THE MERGER
The following discussion summarizes certain provisions of the
Merger Agreement and aspects of the Merger. This summary discussion is not
intended to be a complete description of the Merger and is qualified in its
entirety by reference to the Merger Agreement. The Merger Agreement is
attached as Appendix A and incorporated by reference in this Proxy
Statement.
BACKGROUND OF THE MERGER
SJS. Since the conversion of the Bank, the principal subsidiary
of SJS, from the mutual to stock form of organization in February 1995, SJS
has continuously reviewed its strategic alternatives in light of its
relatively small size, the increasing consolidation of the financial
services industry, shareholder activism, and other relevant considerations.
The initial public stock offering by SJS in connection with the
Bank's mutual-to-stock conversion substantially increased SJS's
capitalization, thereby making it increasingly difficult to maintain an
acceptable level of return on equity. Beginning in June 1995, in light of
SJS's modest return on equity and substantial prices being paid in numerous
bank and thrift mergers, a substantial stockholder of SJS began to urge SJS
to engage a financial advisor to evaluate the possibility of an acquisition
of SJS at a price above the prevailing market price for SJS's stock. The
SJS Board was aware of these recommendations but, consistent with its
fiduciary duties to SJS and all of its stockholders and in light of
applicable federal policies which generally prohibited SJS from taking any
action in connection with a change of control of SJS during the first year
after it converted from mutual to stock form (I.E., until February 15,
1996), did not respond to the stockholder's demands.
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In September 1995, this stockholder commenced a proxy contest
for the purpose of replacing two incumbent directors of the Board of
Directors of SJS. The proxy contest was successful and two of this
stockholder's nominees were elected to the SJS Board.
In June 1996, the Board of Directors of SJS interviewed
several investment banking firms to assist it in its analysis of strategic
alternatives to maximize shareholder value. On July 8, 1996, the Board of
Directors of SJS formally retained The Chicago Corporation as its financial
advisor to assist SJS in analyzing its strategic alternatives.
Coincidentally, on July 15, 1996, SJS received an unsolicited letter from a
financial institution expressing an interest in a possible merger between
the two institutions ("Indication of Interest"). The institution which
sent the unsolicited Indication of Interest to the SJS Board explicitly
stated that it would not participate in a competitive sale of SJS.
At the July 30, 1996 meeting of the SJS Board, representatives of
The Chicago Corporation presented an overview of several strategic
alternatives available to SJS, including comparative estimates of potential
returns to stockholders of SJS if it were to remain an independent
institution or merge with a larger institution. The Chicago Corporation
also performed a preliminary analysis of the consideration proposed in the
unsolicited Indication of Interest received by SJS on July 15, 1996. The
Chicago Corporation and the SJS Board discussed whether SJS should remain a
small independent savings institution and, if so, whether SJS should modify
its stock repurchase and/or dividend programs to boost its return on equity
and also how SJS might increase its net interest income. The Board also
discussed whether SJS should merge with a larger institution and, if SJS
were to seek a merger, how SJS would develop and evaluate merger
opportunities. The Chicago Corporation informed the SJS Board, based on
its analysis of SJS, that a sale of SJS was likely to produce the highest
shareholder returns and that such returns could not be reasonably expected
to be obtained from improvements in its capital structure or operations as
an independent institution in the near future. The Chicago Corporation
also informed the SJS Board that the consideration proposed in the
unsolicited Indication of Interest was fair from a financial point of
view; however, it was not "compelling." At this point in the meeting
extensive deliberations among the SJS Board and its advisors occurred,
including a discussion as to the consequences a solicitation of
acquisition proposals from other institutions might have on the
unsolicited Indication of Interest previously received. Based on The
Chicago Corporation's report and the SJS Board's further deliberations,
the SJS Board authorized The Chicago Corporation to contact seven
institutions (exclusive of the institution which had sent SJS the
unsolicited Indication of Interest), each of which had previously
indicated an interest in an affiliation with SJS.
At the request of the SJS Board, The Chicago Corporation provided
each of the institutions, excluding the institution which submitted the
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unsolicited Indication of Interest, with an informational package
(subsequent to the execution and return of a confidentiality agreement) to
enable them to perform an initial analysis and evaluation of SJS. All
seven of the institutions (collectively, the "Bidders") responded by August
16, 1996 with preliminary proposals. The institution which had submitted
the unsolicited Indication of Interest to the SJS Board on July 15, 1996
declined The Chicago Corporation's offer of the informational package,
thereby effectively withdrawing from the process.
At the August 20, 1996 meeting of the SJS Board, the preliminary
proposals submitted by the Bidders were presented by The Chicago
Corporation to the SJS Board and discussed at length. With the exception
of one Bidder, the consideration offered by the Bidders was generally all
in a comparable range, however, the form of consideration and anticipated
future operations and structure of SJS post-acquisition varied. The
Chicago Corporation, at the direction of the SJS Board, then engaged in
preliminary discussions with the Bidders to permit clarification and
revision of preliminary proposals.
The Chicago Corporation advised the Bidder whose consideration
offered in its preliminary proposal was out of the range of consideration
offered by the other Bidders, that it would need to increase the
consideration offered in its preliminary proposal in order to be
competitive with the other Bidders and in order to be considered as a
potential merger candidate with SJS, at which time this Bidder elected to
withdraw from the process. A second Bidder also elected to withdraw from
the process at this time. The remaining five Bidders thereafter submitted
requests for additional information which was prepared by The Chicago
Corporation and SJS and distributed to these Bidders on September 6, 1996.
Shortly thereafter, four of the five Bidders who had requested additional
information, one of which was Shoreline, expressed an interest in pursuing
a transaction and conducted off-site due diligence of SJS, including
meetings with management of SJS. Following due diligence and further
negotiations and discussions with The Chicago Corporation and SJS, each of
these Bidders put forth a revised proposal in connection with the possible
acquisition of SJS. The Chicago Corporation then prepared and forwarded
to each member of the SJS Board information relating to the operations,
and, where applicable, common stock of the four remaining Bidders.
The SJS Board met on October 15, 1996 to discuss the four revised
proposals submitted by the remaining Bidders. One of the revised proposals
was appreciably lower than the others and therefore was removed from
consideration by the SJS Board. The three other revised proposals were
similar in price, but structured differently, including all stock and
a combination of cash and stock consideration, and despite extensive
deliberation by the SJS Board, no consensus with respect to a particular
proposal was reached by the Board. The SJS Board instructed The Chicago
Corporation to contact the three remaining Bidders to elicit their last and
best proposal ("Final Proposals"). On October 18, 1996, two of the
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Bidders, one of which was Shoreline, submitted Final Proposals to The
Chicago Corporation. The third Bidder indicated that it would not be in a
position to respond to SJS's request for a Final Proposal for 30 days. The
Chicago Corporation informed the SJS Board of the Final Proposals and of
the response of the third Bidder on October 18, 1996, at which time the SJS
Board voted to pursue a merger with Shoreline, based on its Final Proposal
of $27 per share, in cash. Subsequent discussions and negotiations between
Shoreline, Shoreline's legal and financial advisors, SJS, SJS's legal and
financial advisors, and additional on-site due diligence by Shoreline
resulted in a formal offer by Shoreline for SJS, as set forth in the Merger
Agreement.
REASONS FOR AND THE RECOMMENDATION OF THE MERGER
SJS's Board of Directors believes that the terms of the Merger
Agreement, which are the product of arm's length negotiations between
representatives of Shoreline and SJS, are fair and in the best interests of
SJS and its stockholders. In the course of reaching its determination, the
Board of Directors consulted with legal counsel with respect to its legal
duties, the terms of the Merger Agreement and the issues related thereto;
with its financial advisor with respect to the financial aspects and
fairness of the transaction; and with senior management regarding, among
other things, operational matters.
In reaching its determination to approve the Merger Agreement,
SJS's Board of Directors considered all factors it deemed material, which
included the following:
(i) The Board analyzed information with respect to the
financial condition, results of operations, cash flow,
businesses, and prospects of SJS. In this regard, the Board
analyzed the options of selling SJS or continuing on a stand-
alone basis. The range of values on a sale of control basis were
determined to generally exceed the present value of SJS shares on
a stand-alone basis under business strategies which reasonably
could be implemented by SJS.
(ii) The Board considered the written opinion of The Chicago
Corporation that, as of November 6, 1996, the Merger
Consideration to be received by holders of SJS Common Stock
pursuant to the Merger Agreement was fair to stockholders from a
financial point of view (See "-- Opinion of Financial Advisor"
below).
(iii) The Board considered the current operating
environment, including, but not limited to, the continued
consolidation and increasing competition in the banking and
financial services industries, the prospect for further changes
in these industries, the uncertainty pertaining to future federal
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regulatory agency consolidation, and the importance of being able
to capitalize on developing opportunities in these industries.
This information had been periodically reviewed by the Board at
its regular meetings in the months following the conversion and
was also discussed between the Board and various advisors.
(iv) The Board considered the other terms of the Merger
Agreement and exhibits, including the taxable nature of the
Merger Consideration.
(v) The Board considered the detailed financial analyses,
pro forma and other information with respect to SJS and Shoreline
discussed by The Chicago Corporation, as well as the Board's own
knowledge of SJS, Shoreline, and their respective businesses. In
this regard, the latest publicly-available financial and other
information for SJS and Shoreline were analyzed, including a
comparison to publicly-available financial and other information
for other similar savings institutions.
(vi) The Board considered the value of SJS Common Stock
continuing as a stand-alone entity compared to the effect of
combining with Shoreline in light of the factors summarized above
and the current economic and financial environment, including,
but not limited to, other possible strategic alternatives, the
results of the contacts and discussions between SJS and its
financial advisor and various third parties and the belief of the
Board and management that the Merger offered the best transaction
available to SJS and its stockholders (See "-- Background of the
Merger" above).
(vii) The Board considered the likelihood of the Merger
being approved by the appropriate regulatory authorities,
including factors such as market share analyses, Shoreline's
Community Reinvestment Act rating at that time and the estimated
pro forma financial impact of the Merger on Shoreline. The Board
considered information presented by counsel to Shoreline as well
as counsel to SJS specifically with regard to federal regulatory
viewpoints concerning potential anti-competitive effects of the
Merger (See "-- Regulatory Approvals" below).
(viii) The Board considered the ability of Shoreline to pay
the aggregate Merger Consideration. The Board reviewed
Shoreline's liquidity and capital position as reflected in
Shoreline's latest shareholder reports in evaluating the ability
of Shoreline to pay the aggregate Merger Consideration.
(ix) The Board considered the fact that the Merger Agreement
prohibits SJS from initiating, soliciting, or encouraging
discussion with third parties relating to alternative
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transactions and requires the payment of a termination fee of
$2,000,000 to Shoreline in certain events, and the fact that
Shoreline required such provisions as a condition to entering
into the Merger Agreement. The Board also considered that the
Merger Consideration represented the highest price per share
offered by the parties who expressed interest in the acquisition
of SJS.
The foregoing discussion of the information and factors
considered by the Board is not intended to be exhaustive, but constitutes
the material factors considered by the Board. In reaching its
determination to approve and recommend the Merger Agreement, the Board did
not assign any relative or specific weights to the foregoing factors, and
individual directors may have weighed factors differently. After
deliberating with respect to the Merger and the other transactions
contemplated by the Merger Agreement, considering among other things, the
matters discussed above and the opinion of The Chicago Corporation referred
to above, the Board unanimously approved and adopted the Merger Agreement
and the transactions contemplated thereby as being in the best interests of
SJS and its stockholders.
FOR THE REASONS SET FORTH ABOVE, THE BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF SJS
AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS OF SJS VOTE FOR
THE APPROVAL OF THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
In July 1996, The Chicago Corporation was retained by SJS to
evaluate SJS's strategic alternatives and, in certain circumstances, to act
as its financial advisor in connection with its ongoing consideration
and/or implementation of such alternatives. The Chicago Corporation, as
part of its investment banking businesses, is continuously engaged in the
evaluation of business and securities in connection with mergers and
acquisitions, negotiated underwritings, and distributions of listed and
unlisted securities. The Chicago Corporation is familiar with the market
for common stocks of publicly-traded midwest-based banks, thrifts, and bank
and thrift holding companies. The Board selected The Chicago Corporation
on the basis of the firm's reputation and its experience and expertise in
the business, as well as its experience and expertise in transactions
similar to the Merger. On January 2, 1997, The Chicago Corporation was
merged with ABN AMRO Securities, Inc. The resulting company is called
ABN AMRO Chicago Corporation.
The Chicago Corporation participated with the management of SJS
in negotiating the terms of the Merger. Representatives of The Chicago
Corporation attended meetings of the Board in connection with the
evaluation of the Merger, including the meeting held on November 6, 1996 at
which time the Merger was approved. At such meeting, a representative of
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The Chicago Corporation made an oral presentation to the Board and reviewed
with the directors the various aspects of the Merger, including the
financial terms and conditions thereof and comparisons to recent
transactions involving other thrift merger transactions.
At the November 6, 1996 meeting of the Board, The Chicago
Corporation rendered its oral opinion to the effect that, as of that date,
the Merger Consideration was fair, from a financial point of view, to the
holders of SJS Common Stock. In addition, The Chicago Corporation has
delivered its written opinion to the Board as of November 6, 1996 and on
the date of this Proxy Statement stating that, as of November 6, 1996 and
on the date of this Proxy Statement, the Merger Consideration is fair, from
a financial point of view, to the holders of SJS Common Stock. No
limitations were imposed by the Board upon The Chicago Corporation with
respect to the investigations made or procedures followed by it in
rendering its opinion. The Chicago Corporation has consented to the
inclusion herein of the summary of its opinion to the Board and to the
reference to the entire opinion attached hereto as Appendix C-1.
THE FULL TEXT OF THE OPINION OF THE CHICAGO CORPORATION, UPDATED
AS OF THE DATE OF THIS PROXY STATEMENT, WHICH SETS FORTH CERTAIN
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEWS
UNDERTAKEN, IS ATTACHED AS APPENDIX C-1 TO THIS PROXY STATEMENT AND SHOULD
BE READ IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF THE CHICAGO
CORPORATION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE OPINION.
In arriving at its opinion, The Chicago Corporation reviewed,
among other things, the Merger Agreement together with exhibits and
schedules thereto, certain publicly-available information relating to the
business, financial condition and operations of SJS and Shoreline as well
as certain other non-public information, primarily financial in nature,
furnished to it by SJS and Shoreline relating to their respective
businesses, earnings, assets, financial forecasts and prospects. The
Chicago Corporation held discussions with members of senior management of
SJS and Shoreline concerning their respective businesses, earnings, assets,
financial forecasts and prospects. The Chicago Corporation also reviewed
certain publicly available information concerning the trading of, and the
trading market for, SJS Common Stock and Shoreline Common Stock and certain
publicly available information concerning comparable companies and
transactions, all as set forth in its opinion.
In rendering its opinion, The Chicago Corporation assumed and
relied upon the accuracy and completeness of the financial information
provided to it by SJS and Shoreline and obtained by it from public sources.
The Chicago Corporation was not engaged to and did not conduct a physical
inspection of any of the assets, properties or facilities of either SJS or
Shoreline, and was not engaged to do and has not made, obtained or been
furnished with any independent evaluation or appraisal of any such assets,
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properties or facilities or any of the liabilities of SJS or Shoreline.
The Chicago Corporation has also assumed that all of the conditions to the
Merger as set forth in the Merger Agreement would be satisfied on a timely
basis in the manner contemplated by the Merger Agreement. No limitations
were imposed by SJS upon The Chicago Corporation with respect to the scope
of its investigation nor were any specific instructions given to The
Chicago Corporation in connection with its opinion. Furthermore, the
Merger Consideration was not determined by The Chicago Corporation, but
rather was proposed by Shoreline in connection with the process described
under "THE MERGER - Background of the Merger" above.
In connection with rendering its opinion dated November 6, 1996,
The Chicago Corporation considered a variety of financial analyses, which
are summarized below. The Chicago Corporation's analyses must be
considered as a whole and selecting portions of such analyses and of
the factors considered by The Chicago Corporation without considering
all such analyses and factors may create an incomplete view of the
analytical process underlying its opinion. In its analyses, The
Chicago Corporation made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters. Any
estimates contained in The Chicago Corporation's analyses are not
necessarily indicative of future results or values, which may be
significantly more or less favorable than such estimates.
The following is a summary of the material analyses considered by
The Chicago Corporation in connection with its opinion dated November 6,
1996.
COMPARISON WITH SELECTED COMPANIES. The Chicago Corporation
compared the financial performance and stock market valuation of SJS with
corresponding data for publicly-traded thrifts in Michigan, Ohio and
Indiana with assets between $100 million and $300 million, which
consisted of the following selected companies: ASB Financial Corp.;
Bank West Financial Corp.; CB Bancorp, Inc.; Community Bank Shares;
Enterprise Federal Bancorp; FFW Corp.; Fidelity Federal Bancorp; Fidelity
Financial of Ohio; 1ST Bancorp; First Federal Bancorp, Inc.; First Franklin
Corporation; Glenway Financial Corp; LSB Financial Corp.; Marion Capital
Holdings; MFB Corp.; Milton Federal Financial Corp.; Northeast Indiana
Bancorp; OHSL Financial Corp.; Peoples Bancorp; Potters Financial Corp.;
Suburban Bancorporation, Inc.; Winton Financial Corp.; and Wood Bancorp,
Inc. At the time, none of the companies listed above had announced a
merger transaction or disclosed a possible interest in pursing a possible
merger transaction which would have significantly affected its stock market
valuation.
DISCOUNTED CASH FLOW ANALYSIS. Using a discounted cash flow
analysis, The Chicago Corporation estimated the present value of the future
streams of after-tax cash flows that SJS could produce over a five year
period from 1997 through 2001, under various assumptions, based upon SJS
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management's forecasts. The Chicago Corporation estimated the terminal
value of SJS after the five year period by applying an estimated perpetual
growth rate to the terminal year's projected after-tax cash flow and then
applied to this result multiples ranging from 14x to 18x the terminal year's
estimated earnings. The cash flow streams and terminal values were then
discounted to present values using different discount rates chosen to
reflect different assumptions regarding the required rates of return of
prospective buyers of SJS. On the basis of such varying assumptions, this
discounted cash flow analysis indicated a reference range of approximately
$14.00 to $24.00 per share of SJS Common Stock. This analysis was based
upon earnings projections developed by The Chicago Corporation in
consultation with management. The projections are based upon many factors
and assumptions, many of which are beyond the control of SJS or Shoreline.
ANALYSIS OF SELECTED MERGER TRANSACTIONS. The Chicago
Corporation reviewed selected pending and completed thrift merger and
acquisition transactions involving recent midwestern thrift sellers with
assets between $100 million and $300 million. The Chicago Corporation
reviewed various pricing multiples such as the ratios of the offer value
to assets, deposits, stated book value, tangible book value and the last
twelve months earnings of the acquired company in each such transaction,
as well as the ratio of tangible book value premium to core deposits in
each such transaction. The Chicago Corporation also computed the average
and median ratios and multiples for each transaction. The calculations
yielded ranges of ratios of price to stated book value and tangible book
value of 187.3% to 110.0% and 199.8% to 110.0%, respectively, with
median ratios of price to stated book value and tangible book value of
130.4% and 131.8% respectively. The multiple of earnings among
the group ranged from 29.8x to 12.08x, with a median range of 19.92x; and
ratios of offer value to assets ranged from 32.29% to 9.43%, with a median
range of 16.60%.
NO COMPANY OR TRANSACTION USED IN THE ABOVE ANALYSES AS A
COMPARISON IS IDENTICAL TO SJS, SHORELINE, OR THE MERGER. ACCORDINGLY, AN
ANALYSIS OF THE RESULTS OF THE FOREGOING NECESSARILY INVOLVES COMPLEX
CONSIDERATIONS AND JUDGMENTS CONCERNING THE DIFFERENCES IN FINANCIAL AND
OPERATING CHARACTERISTICS OF THE COMPANIES AND OTHER FACTORS THAT COULD
AFFECT THE PUBLIC TRADING VALUES OR ACQUISITION VALUES OF THE COMPANIES TO
WHICH THEY ARE BEING COMPARED. MATHEMATICAL ANALYSIS (SUCH AS DETERMINING
THE MEAN OR MEDIAN) IS NOT, IN ITSELF, A MEANINGFUL METHOD OF USING
COMPARABLE COMPANY OR COMPARABLE TRANSACTION DATA.
In performing its analyses, The Chicago Corporation made numerous
assumptions with respect to industry performance, general business and
economic conditions and other matters. The analyses performed by The
Chicago Corporation are not necessarily indicative of actual values, which
may be significantly more or less favorable than the values suggested by
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such analyses. Such analyses were prepared solely as part of The Chicago
Corporation's opinion. The term "fair from a financial point of view" is a
standard phrase contained in investment banker fairness opinions and refers
to the fact that The Chicago Corporation's opinion as to the fairness of
the Merger Consideration is addressed solely to the financial attributes of
the Merger Consideration. The analyses do not purport to be appraisals or
to reflect the prices at which a company might actually be sold. In
addition, as described above, The Chicago Corporation's fairness opinion
and presentation to the Board were one of many factors taken into
consideration by the Board in making its determination to approve the
Merger Agreement. Consequently, The Chicago Corporation analyses described
above should not be viewed as determinative of the Board's conclusions with
respect to the value of SJS or of the decision of the Board to agree to the
Merger Consideration.
The Chicago Corporation's opinion is based on economic and market
conditions and other circumstances existing on, and information made
available as of, the date of such opinion. In addition, the opinion does
not address SJS's or Shoreline's underlying business decision to effect the
Merger or any other terms of the Merger. The Chicago Corporation is not
rendering any opinion as to the value of SJS Common Stock or Shoreline
Common Stock at the Effective Time.
In connection with its opinion dated as of the date of this Proxy
Statement, The Chicago Corporation performed procedures to update certain
of its analyses and reviewed the assumptions on which such analyses were
based and the factors considered therewith.
The Chicago Corporation, as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
The Chicago Corporation has extensive experience with the valuation of
financial institutions. The Board selected The Chicago Corporation as its
financial advisor because of The Chicago Corporation's industry expertise
with respect to financial institutions and because of The Chicago
Corporation's industry experience in transactions similar to the Merger.
The Chicago Corporation is not affiliated with either SJS or Shoreline.
In the ordinary course of business, The Chicago Corporation makes
a market in Shoreline Common Stock and SJS Common Stock and may actively
trade the securities of Shoreline and SJS for its own account and for the
accounts of its customers. Accordingly, at any time The Chicago
Corporation may hold a long or short position in such securities. The
Chicago Corporation is a member of all principal securities exchanges
in the United States; and in its conduct of its broker-dealer activities
has from time to time purchased securities from, and sold securities to,
the Company and/or Shoreline. Two affiliates of The Chicago Corporation
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manage limited partnerships which invest in publicly-traded securities
of financial institutions. Additionally, The Chicago Corporation
manages two group trusts which invest in publicly-traded securities of
financial institutions. Together, these investment pools, known as The
Banc Funds, have reported ownership of 67,005 shares of SJS Common
Stock and 52,610 shares of Shoreline Common Stock.
Contingent upon completion of the transaction The Chicago
Corporation will receive a fee of approximately $__________ for services
rendered in connection with advising SJS regarding the Merger, including
the fairness opinion and financial advisory services provided to SJS
since The Chicago Corporation was retained in July 1996, inclusive of
out of pocket expenses as of the date of the Proxy Statement. As of
the date of the Proxy Statement, The Chicago Corporation has received
$_______ of such fee. SJS has also agreed to indemnify The Chicago
Corporation against certain liabilities, including certain liabilities
under federal securities laws.
CONSIDERATION TO BE RECEIVED
Under the Merger Agreement, MergerSub will merge with and into
SJS, with SJS becoming a wholly owned subsidiary of Shoreline. Except
under circumstances described in the following paragraph, the stockholders
of SJS at the Effective Time (other than stockholders who have exercised
appraisal rights under the Delaware Law) will become entitled to receive
$27 in cash for each share of SJS Common Stock. SJS stockholders will have
no continuing stockholder relationship with SJS, Shoreline, or MergerSub.
If for any reason, between November 6, 1996 (the date of the
Merger Agreement) and the Effective Time, the number of shares of SJS
Common Stock outstanding or the number of unexercised "Stock Options" (as
defined in the next section ("SJS's Incentive Plan and Stock Options"))
outstanding changes for any reason other than exercise of up to 79,509
existing options (whether or not in breach of the Merger Agreement), then
the amount of cash into which shares of SJS Common Stock are to be
converted will be adjusted as provided in the Merger Agreement.
SJS'S INCENTIVE PLAN AND STOCK OPTIONS
Unless exercised, each option granted under the SJS Bancorp,
Inc., 1996 Stock Option and Incentive Plan (the "Incentive Plan") issued
and outstanding immediately prior to the Effective Time (a "Stock Option")
will be converted into the right to receive the difference between $27 and
the applicable option exercise price.
At Shoreline's request, SJS must use its best efforts to enter
into option termination agreements with the holders of the options pursuant
to which SJS will agree to pay to the holders the difference between $27
and the option exercise price immediately prior to the Merger upon
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surrender and cancellation of their outstanding options. If SJS fails to
enter into agreements with all holders of options under the Incentive Plan,
Shoreline will notify the remaining holders of options under the Incentive
Plan of the procedure for receipt of payments for their unexercised
options. Such payments will be made by Shoreline within 10 days after an
option holder has surrendered all of his or her options to Shoreline.
EFFECTIVE TIME
If the stockholders of SJS approve the Merger Agreement at the
Special Meeting, and the other conditions to the Merger set forth in the
Merger Agreement are satisfied, the closing of the transactions
contemplated by the Merger Agreement (the "Closing") and the Effective Time
is anticipated to be during the second quarter of 1997, provided that the
Merger Agreement has not been terminated prior to such time (See "THE
MERGER -- Conditions Precedent to the Merger and Possible Termination of
the Merger Agreement" below). The Merger may not be consummated prior to
receiving the Regulatory Approvals. The Merger will be effective at a
specific time and date to be specified in the certificates of merger to be
filed in accordance with the Michigan Business Corporation Act and the
Delaware Law ("the Effective Time").
PAYMENT FOR SHARES
At the Effective Time, holders of certificates formerly
representing shares of SJS Common Stock (other than shares held by SJS
stockholders who have exercised appraisal rights) will cease to have any
rights as SJS stockholders and their certificates automatically will
represent only the right to receive the cash into which their shares of SJS
Common Stock will have been converted by the Merger. Promptly after the
Effective Time, Shoreline Bank (acting as the exchange agent) will send
written instructions and a letter of transmittal to each holder of record
of SJS Common Stock (other than stockholders who have exercised appraisal
rights), indicating the method for exchanging such holder's stock
certificates for cash in respect thereof. HOLDERS OF SJS COMMON STOCK
SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE INSTRUCTIONS FROM
SHORELINE BANK. Shoreline Bank, upon receipt of such certificates (or
affidavits of lost certificates and indemnity bonds) and a properly
completed letter of transmittal, will promptly pay the holder by check.
CONDITIONS PRECEDENT TO THE MERGER AND POSSIBLE TERMINATION OF THE MERGER
AGREEMENT
CONDITIONS PRECEDENT. The obligations of Shoreline to consummate
the transactions provided for by the Merger Agreement are subject to the
satisfaction at or prior to the closing of each of the following conditions
(collectively, "Shoreline's Conditions"), any one or more of which may, to
the extent waivable, be waived by Shoreline:
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(i) That the representations and warranties of SJS
contained in the Merger Agreement are true and correct in all
material respects as of November 6, 1996, and as of the Closing,
and SJS has performed all agreements and covenants required by
the Merger Agreement to be performed by it;
(ii) That there has not occurred any event, development, or
circumstance related to the business, condition (financial or
otherwise), capitalization, or properties of SJS or SJS's
subsidiaries that had or could reasonably be expected to have a
material adverse effect on the financial condition, net income,
business, or operations of SJS and SJS's subsidiaries, taken as a
whole, other than: (A) an adverse effect caused solely by a
change in laws or regulations or other factors (including, but
not limited to, a special SAIF premium assessment or a change in
general economic conditions or interest rates, and the "mark to
market" implications of those events) affecting the financial
condition, net income, business, or operations of thrift or
banking institutions generally; or (B) legal, accounting, and
investment bankers' expenses incurred by SJS in connection with
SJS's negotiation of the Merger Agreement and the consummation of
the Merger;
(iii) That all Regulatory Approvals and other necessary
consents from third parties are received;
(iv) That neither Shoreline nor SJS are subject to any
order, decree, or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the
Merger;
(v) That Shoreline receive an opinion from its independent
auditors to the effect that, immediately prior to the Effective
Time, the Bank qualifies as a "domestic building and loan
association" within the meaning of <Section> 7701(a)(19) of the
Internal Revenue Code of 1986, as amended (the "Code");
(vi) That Shoreline receive the opinion of SJS's counsel
substantially in the form set forth in the Merger Agreement;
(vii) That Shoreline receive the opinion of its counsel
relating to the tax consequences of the transactions contemplated
under the Merger Agreement, in form and content reasonably
satisfactory to Shoreline;
(viii) That Shoreline receive certificate(s) dated as of the
Closing Date on behalf of SJS, and by the transfer agent for SJS
Common Stock, certifying (A) the total number of shares of
capital stock of SJS issued and outstanding as of the close of
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business on the day immediately preceding the Closing; and (B)
with respect to the secretary's certification, the number of
shares of SJS Common Stock, if any, that are issuable on or after
that date;
(ix) That Shoreline receive evidence of the waiver of any
material rights and the waiver of the loss of any material rights
that may be triggered by the change of control of SJS upon
consummation of the Merger under any agreements described in
SJS's disclosure statement, the breach of which would cause a
material adverse effect on the financial condition, net income,
business, or operations of SJS and SJS's subsidiaries, taken as a
whole;
(x) That all investigation and remediation with respect to
any environmental risk identified during Shoreline's
environmental assessments is substantially completed to
Shoreline's reasonable satisfaction, as provided in the Merger
Agreement;
(xi) That Shoreline receive statements from key employees of
SJS regarding their current compensation substantially in the
form contained in Merger Agreement;
(xii) That Shoreline receive from the Internal Revenue
Service ("IRS") a private letter ruling, or a satisfactory
opinion from tax counsel or tax accountants, regarding the Bank's
pre-1988 bad debt reserves.
(xiii) That Shoreline and SJS receive from SJS's employees
all amendments to employment agreements, severance agreements,
stock option agreements, restricted stock agreements, or other
compensation agreements with respect to "Excess Parachute
Payments" (as defined below), as described in the Merger
Agreement; and
(xiv) That SJS deliver to Shoreline at the Closing such
other certificates, instruments, and documents as may be
reasonably requested by Shoreline prior to the Closing.
The obligations of SJS to consummate the transactions provided
for by the Merger Agreement are subject to the satisfaction at or prior to
the closing of each of the following conditions (collectively, "SJS's
Conditions"), any one or more of which may, to the extent waivable, be
waived by SJS:
(i) That at least a majority of the votes eligible to be
cast by SJS's stockholders are voted to adopt the Merger
Agreement;
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<PAGE>
(ii) That all Regulatory Approvals and other necessary
consents from third parties are received;
(iii) That the representations and warranties of Shoreline
contained in the Merger Agreement are true and correct in all
material respects as of November 6, 1996 and as of the Closing
and Shoreline has performed all agreements and covenants required
by the Merger Agreement to be performed by it;
(iv) That neither Shoreline nor SJS are subject to any
order, decree, or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the
Merger;
(v) That SJS receive the opinion of Shoreline's counsel
substantially in the form set forth in the Merger Agreement; and
(vi) That Shoreline deliver to SJS at the Closing such other
certificates, instruments, and documents as may be reasonably
requested by SJS prior to the Closing.
TERMINATION. The Merger Agreement and the Merger may be
terminated and the transactions contemplated by the Merger Agreement may be
abandoned at any time prior to the Closing, regardless of whether the
Merger Agreement is adopted by SJS's stockholders, by (i) mutual agreement
authorized by the boards of directors of Shoreline and SJS (or duly
authorized committees of the boards); (ii) the board of directors of
Shoreline upon the occurrence of certain events, or (iii) the board of
directors of SJS upon the occurrence of certain events.
The board of directors of Shoreline may terminate the Merger
Agreement if, at any time after the Closing could otherwise be called,
there is a failure by SJS to satisfy one or more of certain of the
Shoreline Conditions, as set forth in the Merger Agreement.
The board of directors of Shoreline also may terminate the Merger
Agreement if (i) the Effective Time has not occurred prior to September 30,
1997, without material fault on the part of Shoreline; (ii) the board of
directors of SJS withdraws, modifies, or changes in a manner adverse to
Shoreline, its approval or recommendation of the Merger Agreement or the
Merger (referred to as a "Change in Board Recommendation"), (iii) the board
of directors of SJS recommends an acquisition proposal or offer, or
executes an agreement providing for a tender offer or exchange offer for
any shares of capital stock of SJS, or a merger, consolidation, or other
business combination of SJS or the Bank or a sale of more than 25 percent
of the assets of SJS or the Bank with or to a person or entity other than
Shoreline (referred to as an "Acquisition Proposal"); (iv) it is publicly
disclosed (or Shoreline learns) that any person, entity, or group has
acquired beneficial ownership of more than 19.9 percent of any class or
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series of capital stock of SJS through the acquisition of stock, the
formation of a group or otherwise, or has been granted an option, right, or
warrant, conditional or otherwise, to acquire beneficial ownership of more
than 19.9 percent of any class or series of capital stock of SJS (referred
to as an "Acquiring Person"); or (v) Shoreline gives SJS notice of an
unacceptable environmental risk pursuant to the Merger Agreement and such
risk is not cured within the 30-day period (or any extension thereof).
The board of directors of SJS may terminate the Merger Agreement
if, at any time after the Closing could otherwise be called, there has been
a failure by Shoreline to satisfy the Shoreline Conditions (referred to as
a "Failure of Condition").
The board of directors of SJS also may terminate the Merger
Agreement if (i) the Effective Time has not occurred prior to September 30,
1997, without material fault on the part of SJS; or (ii) on or after June
30, 1997, the Effective Time has not occurred and the Federal Reserve Board
has not yet approved the Merger (a "Delayed Regulatory Approval").
The board of directors of either Shoreline or SJS may terminate
the Merger Agreement at any time after the date that (i) the SJS
stockholders vote against adoption of the Merger Agreement; (ii) any
Regulatory Approval is denied by final order; or (iii) either Shoreline or
SJS is subject to any order, decree, or injunction of a court or agency of
competent jurisdiction that permanently enjoins or prohibits the
consummation of the Merger (collectively, "Reciprocal Termination Rights").
EFFECT OF TERMINATION. No termination of the Merger Agreement
will release either party from its obligations regarding (among other
provisions) confidentiality and the payment of expenses. In the event of a
termination of the Merger Agreement, notice must be immediately given to
the other party. After the expiration of any applicable cure period
without the grounds for termination being cured, the Merger Agreement will
immediately become null and void, and there will be no liability on the
part of Shoreline or SJS except (i) for fraud or for willful and material
breach of the Merger Agreement, and (ii) obligations regarding expenses,
discussed below.
TERMINATION FEE. SJS must pay Shoreline $2,000,000 if:
(i) the board of directors of Shoreline terminates the
Merger Agreement as a result of a Change in Board Recommendation
or an Acquisition Proposal, or
(ii) the board of directors of Shoreline terminates the
Merger Agreement as a result of someone becoming an Acquiring
Person and within one year of termination, the Acquiring Person
acquires or beneficially owns a majority of the then outstanding
shares of SJS Common Stock, obtains representation of two or more
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directors on SJS's board of directors, or enters into a
definitive agreement with SJS with respect to an acquisition
proposal or similar business combination.
SJS must pay Shoreline $750,000 if the board of directors of
Shoreline terminates the Merger Agreement due to a willful and material
breach of any of the representations and warranties of SJS set forth in the
Merger Agreement or a willful and material breach of any material
obligation, agreement, or covenant contained in the Merger Agreement by
SJS. The events described in the preceding two paragraphs are referred to
as "Shoreline Trigger Events."
In addition to any other amount due, upon the termination of the
Merger Agreement due to the occurrence of a Shoreline Trigger Event, SJS
must promptly assume and pay Shoreline for all reasonable fees and expenses
incurred, or to be incurred by Shoreline and Shoreline Bank (including the
fees and expenses of legal counsel, accountants, financial advisors, other
consultants, and financial printers) in connection with the Merger
Agreement, the Merger, and the other transactions contemplated by the
Merger Agreement, in an amount not to exceed $250,000 in the aggregate.
Shoreline must pay SJS $750,000 if the board of directors of SJS
terminates the Merger Agreement due to a willful and material breach of any
of the representations and warranties of Shoreline set forth in the Merger
Agreement or a willful and material breach of any material obligation,
agreement, or covenant contained in the Merger Agreement by Shoreline
(referred to as an "SJS Trigger Event"). In addition to any other amount
due, upon the termination of the Merger Agreement due to the occurrence of
a SJS Trigger Event or SJS's termination of the Merger Agreement pursuant
to a Failure of Condition, Delayed Regulatory Approval, or Reciprocal
Termination Rights, Shoreline must promptly pay SJS for all reasonable fees
and expenses incurred, or to be incurred by SJS and SJS's subsidiaries
(including the fees and expenses of legal counsel, accountants, financial
advisors, other consultants, and financial printers) in connection with the
Merger Agreement, the Merger, and the other transactions contemplated by
the Merger Agreement, in an amount not to exceed $250,000 in the aggregate.
BUSINESS OF SJS PENDING THE MERGER
The Merger Agreement contains covenants of SJS concerning the
conduct of its business. The covenants remain in effect until the
Effective Time or until the Merger Agreement has been terminated. They
include, among others, an agreement that SJS and the Bank will (i) allow
Shoreline access to certain information regarding SJS's business; (ii)
operate the business in the ordinary course and consistent with past
practices; (iii) advise and cooperate with Shoreline with respect to
anticipated renewals or extensions of existing data processing service and
related agreements; (iv) permit Shoreline to conduct an environmental
assessment of each parcel of SJS's real property and, at Shoreline's
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<PAGE>
option, any other real estate formerly owned by SJS or SJS's subsidiaries;
and (v) promptly seek to obtain from each employee of SJS who, as a result
of the change of control of SJS in the Merger, would be entitled to an
"Excess Parachute Payment" (as defined below), a mutually satisfactory
amendment to any such agreement to adjust or otherwise modify the amount or
timing of compensation due.
Nothing contained in the Merger Agreement will preclude SJS from
declaring and paying cash dividends on SJS Common Stock quarterly at a rate
not to exceed $0.11 per share in a manner, on dates, and with respect to
record dates consistent with past practice. The Board of Directors of SJS
is under no obligation to pay dividends on SJS Common Stock.
CONSOLIDATION OF THE BANK
Immediately following the Merger, it is anticipated that the Bank
will be merged into Shoreline Bank, with Shoreline Bank surviving that
merger. The merger of the Bank with and into Shoreline Bank will be
accomplished pursuant to a bank consolidation agreement in a form
consistent with the Merger Agreement, the Michigan Banking Code of 1969, as
amended, and the federal Home Owners' Loan Act, as amended.
REGULATORY APPROVALS
Consummation of the Merger is subject to approval of the Federal
Reserve Board and the OTS. The Merger may not be consummated for a period
of 30 days after receipt of the Federal Reserve Board's final approval
unless the Federal Reserve Board has not received any adverse comment from
the United States Department of Justice during the first 15 days following
final approval, in which case the Merger may be consummated on or after the
15th day after final approval by the Federal Reserve Board. An application
for prior approval of the Merger was submitted to the Federal Reserve Board
on _______, 199__, and to the OTS on ______. There can be no assurance as
to when or if such approvals will be granted.
MATERIAL AGREEMENTS RELATING TO THE MERGER AND INTERESTS OF CERTAIN PERSONS
As of _____________, 1996, the directors and executive officers
of SJS are the beneficial owners of a total of _____ shares, or __ percent
of the outstanding shares, of SJS Common Stock.
Shoreline and Shoreline Bank have agreed to honor and be bound by
all employment agreements with SJS's or SJS's subsidiaries' executive
officers. SJS is required to cause the Bank to give each executive officer
notice that, subject to the consummation of the Merger, the term of the
employment agreement will not be extended for any additional period.
SJS and Shoreline have agreed to promptly seek to obtain from
each employee of SJS who, as a result of the change of control of SJS in
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the Merger, would be entitled to an "Excess Parachute Payment" (as defined
in the Code), a mutually satisfactory amendment to any such agreement to
adjust the aggregate amount of compensation due, extend the time period
over which the compensation is payable, amend other terms and conditions,
or any combination of these changes; all in order to prevent all
compensation payable under such agreements from being characterized as an
Excess Parachute Payment.
SJS and Shoreline have agreed to certain treatment of the Stock
Options (See "THE MERGER -- SJS's Incentive Plan and Stock Options" above).
Those individuals who hold such Stock Options and the respective amount
held are set forth in "SJS BANCORP, INC. -- Beneficial Ownership of Certain
Persons" below. In addition, the officers of SJS and its subsidiaries are
participants in the "ESOP" (as defined below), and as such, will receive
cash for those interests, as set forth in the Merger Agreement. (See "THE
MERGER -- Treatment of the ESOP" below).
SJS maintains the SJS Bancorp, Inc. Management Recognition Plan
(the "Plan"). Under the Plan, certain executives and directors of the
Company were awarded grants of restricted stock in February, 1996. The
restricted stock under the Plan will become 100% vested upon the
consummation of the Merger, and thus, the individuals holding restricted
stock under the Plan would become unconditionally entitled to $27 in cash
for each share of stock granted under the Plan. 30,612 shares of
restricted stock have been granted to directors and executive officers
under the Plan.
In the Merger Agreement, Shoreline acknowledged that any and all
rights to indemnification then existing in favor of the directors and
officers of SJS and each of SJS's subsidiaries under their respective
certificate or articles of incorporation or bylaws will survive the Merger
and will continue with respect to acts and omissions occurring before the
Effective Time with the same force and effect as prior to the Effective
Time.
TREATMENT OF THE ESOP
Prior to the Effective Time, SJS may amend the SJS Bancorp, Inc.
Employee Stock Ownership Plan, as amended (the "ESOP") to provide for (i)
full vesting of benefits by participants; and (ii) elimination of the
requirement for a participant to be employed on the last day of the year to
receive an employer contribution, other annual additions, or allocations.
SJS may not make any other amendments to the ESOP without the prior written
consent of Shoreline and may only make additional contributions to the ESOP
at levels consistent with prior practice and applied to the ESOP
indebtedness (the "ESOP Debt").
Any cash received by the ESOP trustee in the course of the Merger
with respect to unallocated shares of SJS Common Stock must be applied by
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the trustee to the repayment of the ESOP Debt. The balance of the cash, if
any, received by the ESOP trustee in the course of the Merger with respect
to unallocated shares of SJS Common Stock will be allocated to the accounts
of all participants in the ESOP who have accounts remaining under the ESOP
(whether or not the participants are then actively employed) and
beneficiaries in proportion to the account balances of the participants and
beneficiaries as they existed as of the Effective Time (and, if required,
to the accounts of former participants or their beneficiaries) as
investment earnings of the ESOP, except to the extent that any portion of
the balance of the cash received by the ESOP trustee would be subject to
the limitations of Section 415 of the Internal Revenue Code for that year.
Prior to such an allocation, the administrative and other
authority previously exercised with respect to the ESOP by the board of
directors of SJS or SJS's subsidiaries will be exercised solely by a
committee appointed by the board of directors of SJS and in place under the
terms of the ESOP at the Effective Time. If the ESOP is required to be
maintained for a transition period after the Effective Time in order to
fully allocate to participants the cash received in the Merger with respect
to unallocated shares of SJS Common Stock, Shoreline has agreed to cause
the ESOP to be so continued for a period of up to 24 months after the
Effective Time for the benefit of its participants to the extent permitted
by ERISA, the Code and other applicable laws and regulations. However, in
such event, the ESOP must be amended, effective as of the Effective Time,
to provide that there cannot be any new participants in the plan on or
after the Effective Time.
Upon the making of all allocations required in the Merger
Agreement, the ESOP will be terminated and the account balances therein
will be distributed to participants or their beneficiaries, with the right
of tax-free rollover, to the extent permitted by law, to an individual
retirement account or another tax-qualified plan of Shoreline, at the
election of the distributee. As a condition to any distributions,
Shoreline may secure a favorable determination letter for termination from
the IRS relating to that termination and distribution. If a determination
letter is secured, all distributions will be made in strict compliance with
the determination letter.
SJS is entitled to file with the IRS an application, at any time
prior to the Effective Time, for an advance determination letter relating
to termination of the ESOP and/or the methodology for allocating proceeds.
If, at the expiration of the full transition period for continued
maintenance of the ESOP, there remains unallocated proceeds, then Shoreline
may take any action it deems appropriate with respect to the ESOP,
including (but not limited to) terminating the ESOP and making
distributions from the ESOP or merging the ESOP into another Shoreline
tax-qualified plan.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain of the principal federal
income tax consequences of the Merger to holders whose shares of SJS Common
Stock are converted to cash in the Merger (including pursuant to the
exercise of appraisal rights). The discussion applies only to holders of
shares of SJS Common Stock in whose hands shares of SJS Common Stock are
capital assets, and may not apply to shares of SJS Common Stock received
pursuant to the exercise of employee stock options or otherwise as
compensation, or to holders of shares of SJS Common Stock who are in
special tax situations (such as insurance companies, tax-exempt
organizations, or non-U.S. persons).
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE BASED
UPON CURRENT LAW. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH HOLDER
OF SHARES OF SJS COMMON STOCK SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR
TO DETERMINE THE APPLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH
STOCKHOLDER AND THE PARTICULAR TAX EFFECTS OF THE MERGER, INCLUDING THE
APPLICATION AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER INCOME AND OTHER
TAX LAWS.
The receipt of cash for shares of SJS Common Stock pursuant to
the Merger (including pursuant to the exercise of appraisal rights) will be
a taxable transaction for federal income tax purposes (and also may be a
taxable transaction under applicable foreign, state, local and other income
and other tax laws). In general, for federal income tax purposes, a holder
of shares of SJS Common Stock will recognize gain or loss equal to the
difference between his or her adjusted tax basis in the shares of SJS
Common Stock converted to cash in the Merger and the amount of cash
received therefor. Gain or loss must be determined separately for each
block of shares of SJS Common Stock (i.e., shares of SJS Common Stock
acquired at the same cost in a single transaction) converted to cash in the
Merger. Such gain or loss will be capital gain or loss and will be
long-term gain or loss if, on the date of the Merger, the shares of SJS
Common Stock were held for more than 1 year. With respect to stockholders
exercising appraisal rights, amounts, if any, that are or are deemed to be
interest for federal income tax purposes will be taxed as ordinary income.
Payments in connection with the Merger may be subject to "backup
withholding" at a rate of 31%. Backup withholding generally applies if a
stockholder (i) fails to furnish to the exchange agent his or her social
security number or taxpayer identification number ("TIN"), (ii) furnishes
an incorrect TIN, (iii) fails properly to include a reportable interest or
dividend payment on such stockholder's federal income tax return, or (iv)
under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the TIN provided is such stockholder's
correct number and that such stockholder is not subject to backup
withholding. Backup withholding is not an additional tax but merely an
advance payment that may be refunded to the extent it results in an
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overpayment of tax. Certain persons generally are entitled to exemption
from backup withholding, including corporations and financial institutions.
Certain penalties apply for failure to furnish correct information and for
failure to include reportable payments in income. Each stockholder should
consult with his or her own tax advisor as to qualification for exemption
from backup withholding and the procedure for obtaining such exemption.
ACCOUNTING TREATMENT
Shoreline will treat the Merger as a purchase for accounting
purposes.
SJS BANCORP, INC.
DESCRIPTION OF THE BUSINESS
GENERAL. SJS is a Delaware corporation that was organized in
1994 by SJS Federal Savings Bank (the Bank) for the purpose of becoming the
savings and loan holding company of the Bank. SJS owns all of the
outstanding stock of the Bank issued on February 15, 1995 in connection
with the Bank's conversion from the mutual to the stock form of
organization (the "Conversion"). Unless the context otherwise requires,
all of the following references to the Bank or SJS include SJS and the Bank
on a consolidated basis.
The Bank, SJS's only operating subsidiary, was originally
chartered under the laws of the state of Michigan in 1916 as St. Joseph
Building and Loan Association and converted to a federally chartered mutual
savings and loan association in 1985. In 1988, the Bank amended its
charter to become a federal savings bank under its current name.
The Bank is a retail oriented financial institution offering a
variety of financial services to meet the needs of the communities it
serves. The Bank attracts retail deposits from the general public and
invests those funds primarily in one- to four-family residential mortgage
loans and mortgage-backed securities. The Bank also originates consumer
loans and, to a significantly lesser extent, commercial real estate, multi-
family and construction loans in its market area. See "Lending Activities
- - One- to Four-Family Residential Mortgage Lending." The Bank also invests
in U.S. Government agency obligations and other permissible investments.
See "Lending Activities - Investment Activities."
Through its four full-service offices, the Bank serves
communities located in Berrien, Van Buren, Allegan and Cass Counties,
Michigan. At September 30, 1996, SJS had total assets of $151.8 million,
deposits of $109.8 million, and stockholders' equity of $15.8 million.
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The Bank's operations are regulated by the Office of Thrift
Supervision (the "OTS"). The Bank is a member of the Federal Home Loan
Bank System ("FHLB System") and a stockholder in the Federal Home Loan Bank
("FHLB") of Indianapolis. The Bank is also a member of the Savings
Association Insurance Fund ("SAIF") and its deposit accounts are insured up
to applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
LENDING ACTIVITIES - GENERAL. Historically, the Bank originated
primarily fixed-rate, one- to four-family mortgage loans. In the early
1980s, the Bank began to originate adjustable-rate mortgage loans ("ARMs")
and shorter-term consumer loans for retention in its portfolio. The Bank
continues to originate fixed-rate mortgage loans in response to customer
demand. The Bank underwrites mortgage loans generally using secondary
market guidelines allowing them to be saleable, primarily to the Federal
Home Loan Mortgage Corporation ("FHLMC"). The Bank generally retains the
right to service the loans it sells. In fiscal 1995, as part of its
business plan, the Bank established interest rate levels at or above which
it would retain certain fixed-rate mortgage loans for its own portfolio.
See "One- to Four-Family Residential Mortgage Lending" and "Loan
Originations, Purchases and Sales." At June 30, 1996, the Bank's net loan
portfolio totaled $98.9 million.
Loan applications are initially considered and approved at
various levels of authority, depending on the amount and type of the loan.
Residential loans up to $150,000 are approved by the Bank's Loan Committee,
consisting of three Board members, with loans over that amount requiring
approval of the Board of Directors. Commercial real estate loans up to
$250,000 are approved by the Bank's Loan Committee, with Board approval
required for loans over that amount. Consumer loans are approved by
specific officers or directors pursuant to limits established by the Board.
The aggregate amount of loans that the Bank is permitted to make
under applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Bank could have invested in any
one real estate project is generally the greater of 15% of unimpaired
capital and surplus or $500,000. See "Regulation - Federal Regulation of
Savings Associations." At June 30, 1996, the maximum amount which the Bank
could have loaned to any one borrower and the borrower's related entities
was approximately $2.1 million. At that date, the Bank's largest lending
relationship to a single borrower or a group of related borrowers totaled
$640,000, secured by a single family residence located in the Bank's market
area. The Bank had only six other lending relationships to a single
borrower or a group of related borrowers which exceeded $500,000 at
June 30, 1996. These loans were all performing in accordance with their
terms at June 30, 1996.
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percentages at the dates indicated.
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<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------------------------
1996 1995 1994
---------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family . . . . . . . . . . $ 70,035 67.60% $46,347 62.15% $36,870 67.39%
Multi-family. . . . . . . . . . . . . . 1,286 1.24 874 1.17 437 .80
Commercial. . . . . . . . . . . . . . . 466 .45 536 .72 553 1.01
Construction<F1>. . . . . . . . . . . . 6,941 6.70 2,736 3.67 1,761 3.22
-------- ------ ------- ------ ------- ------
Total real estate loans . . . . . . . 78,728 75.99 50,493 67.71 39,621 72.42
-------- ------ ------- ------ ------- ------
OTHER LOANS:
Consumer Loans:
Automobile. . . . . . . . . . . . . . . 16,118 15.56 16,118 21.61 9,005 16.46
Home equity . . . . . . . . . . . . . . 2,300 2.22 2,033 2.73 1,925 3.52
Personal loans secured by
real estate . . . . . . . . . . . . . 2,712 2.62 2,380 3.19 1,772 3.24
Energy conservation . . . . . . . . . . 1,344 1.30 1,453 1.95 846 1.54
Other . . . . . . . . . . . . . . . . . 2,206 2.13 2,026 2.72 1,543 2.82
-------- ------ ------- ------ ------- ------
Total consumer loans. . . . . . . . . 24,680 23.83 24,010 32.20 15,091 27.58
-------- ------ ------- ------ ------- ------
Commercial business . . . . . . . . . . 190 .18 68 .09
-------- ------ ------- ------
Total loans. . . . . . . . . . . . . . . 103,598 100.00% 74,571 100.00% 54,712 100.00%
====== ====== ======
LESS:
Loans in process. . . . . . . . . . . . 4,030 2,021 1,417
Deferred fees and discounts . . . . . . 60 173 185
Allowance for losses. . . . . . . . . . 646 559 572
-------- ------- -------
Total loans receivable, net . . . . . . $ 98,862 $71,818 $52,538
======== ======= =======
___________________________________
<FN>
<F1> Includes approximately $193,000 and $240,000 of loans on undeveloped
land at June 30, 1996 and 1995, respectively.
</FN>
</TABLE>
-33-
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
One- to four-family. . . . . . . . . $ 45,654 44.07% $13,443 18.03% $ 8,803 16.09%
Multi-family . . . . . . . . . . . . --- --- --- --- --- ---
Commercial real estate . . . . . . . 314 .30 359 .48 344 .63
Construction . . . . . . . . . . . . 6,128 5.91 208 .28 193 .35
-------- ------ ------- ------ ------- ------
Total real estate loans . . . . . . 52,096 50.28 14,010 18.79 9,340 17.07
-------- ------ ------- ------ ------- ------
Consumer . . . . . . . . . . . . . . 21,825 21.07 21,432 28.74 12,782 23.36
-------- ------ ------- ------ ------- ------
Total fixed-rate loans. . . . . . . 73,921 71.35 35,442 47.53 21,122 40.43
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family. . . . . . . . . 24,381 23.54 32,904 44.12 28,067 51.30
Multi-family . . . . . . . . . . . . 1,286 1.24 874 1.17 437 .80
Commercial real estate . . . . . . . 153 .15 177 .24 209 .38
Construction . . . . . . . . . . . . 813 .78 2,528 3.39 1,568 2.87
Consumer . . . . . . . . . . . . . . 3,044 2.94 2,646 3.55 2,309 4.22
-------- ------ ------- ------ ------- ------
Total adjustable-rate loans . . . . 29,677 28.65 39,129 52.47 32,590 59.57
-------- ------ ------- ------ ------- ------
Total loans . . . . . . . . . . . . 103,598 100.00% 74,571 100.00% 54,712 100.00%
====== ====== ======
LESS:
Loans in process. . . . . . . . . . . 4,030 2,021 1,417
Deferred fees and discounts . . . . . 60 173 185
Allowance for loan losses . . . . . . 646 559 572
-------- ------- -------
Total loans receivable, net . . . . $ 98,862 $71,818 $52,538
======== ======= =======
</TABLE>
-34-
<PAGE>
The following table sets forth the contractual maturity of the
Bank's loan portfolio at June 30, 1996. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during
which the contract matures. The table does reflect scheduled principal
amortization but does not reflect the effects of possible prepayments,
interest rate adjustments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
REAL ESTATE
-----------------------------------------------------------
MULTI-FAMILY AND
ONE- TO FOUR FAMILY COMMERCIAL CONSTRUCTION CONSUMER TOTAL
------------------- ------------------ ------------------- ---------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- -------- -------- -------- -------- -------- ---------
(Dollars In Thousands)
DUE DURING
YEARS ENDING
JUNE 30,
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997<F1> . . . . . . . $ 15 7.59% $ 15 8.00% $ --- ---% $ 1,609 10.02% $ 1,639 9.98%
1998 . . . . . . . . . 729 7.59 456 10.50 31 9.32 1,559 9.29 2,775 9.04
1999 . . . . . . . . . 1,915 7.17 26 9.62 820 8.53 3,426 9.02 6,187 8.38
2000 and 2001. . . . . 4,811 7.88 57 9.53 173 7.96 12,960 9.19 18,001 8.83
2002 - 2006. . . . . . 24,749 7.59 725 9.47 5,154 7.46 5,186 9.59 35,814 7.90
2006 - 2021. . . . . . 18,338 7.97 344 8.91 160 8.25 130 10.39 18,972 8.00
2022 and following . . 19,478 8.09 129 9.38 603 8.30 --- --- 20,210 8.10
__________________
<FN>
<F1> Includes demand loans, loans having no stated maturity and overdraft
loans.
</FN>
</TABLE>
-35-
<PAGE>
The total amount of loans due after June 30, 1997 which have
fixed interest rates is $73.2 million while the total amount of loans due
after such date which have floating or adjustable interest rates is $28.8
million.
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. The Bank
focuses its lending efforts primarily on the origination of permanent loans
secured by first mortgages on owner-occupied, one- to four-family
residences. At June 30, 1996, $70.0 million, or 67.6% of the Bank's gross
loan portfolio consisted of permanent loans secured by one- to four-family
residences. Substantially all of these loans were secured by properties
located in the Bank's market area.
The Bank currently offers fixed-rate and ARM loans. For the
fiscal year ended June 30, 1996, the Bank originated $42.4 million of
fixed-rate loans and $3.2 million of ARM loans secured by one- to four-
family residential real estate.
The Bank currently originates loans with a maximum term of 30
years, in amounts up to 95% of the appraised value of the security
property, provided that private mortgage insurance is obtained in an amount
sufficient to reduce the Bank's exposure to not more than 80% of the
appraised value. The Bank currently offers one- and three-year ARM loans
with an interest rate margin over the One- and Three-Year Constant Maturity
Treasury Index, respectively. These loans generally provide for a 2%
annual cap and a lifetime cap of 6% over the initial rate. As a
consequence of using caps, the interest rates on these loans may not be as
rate sensitive as is the Bank's cost of funds. The Bank originates ARMs
which may have an initial interest rate that is lower than the sum of the
specified index plus the margin. Borrowers with adjustable-rate loans are
qualified at the fully-indexed rate. The Bank's permanent ARM loans
generally do not provide the borrower the option to convert the loan to a
fixed-rate loan. The Bank's ARMs do not permit negative amortization of
principal.
The Bank also offers fixed-rate balloon loans with maturities of
three, five, seven and nine years. These loans do not have rollover
provisions and require the borrower to repay the loans by the stated
maturity. Underwriting standards for these loans conform to the Bank's
normal standards based on the respective amortization schedules. The
monthly payment schedule is based on amortization schedules of 15 years for
the three-year, 20 years for the five-year, and 30 years for both the
seven- and nine-year products. Total originations for the balloon products
during the fiscal year ended June 30, 1996 totaled $30.5 million, of which
$1.7 million were three year balloon mortgages and $4.2 million were five
year balloon mortgages.
During fiscal 1995, the Bank modified its loan sales policy to
provide that fixed-rate loan products that meet certain criteria will be
-36-
<PAGE>
retained in portfolio. Under the revised policy, the Bank originates for
retention in its portfolio: 15-year, fixed-rate loans with yields equal to
or greater than 8%; 20-year, fixed-rate loans with yields equal to or
greater than 8.5%; and 30-year fixed-rate, loans with yields equal to or
greater than 9.5%. Under the revised policy, the Board of Directors of the
Bank has established an overall limit on the total amount of 15-year, 20-
year and 30-year fixed-rate loans that will be retained in portfolio, equal
to 15%, 10% and 10%, respectively, of total assets. See "- Loan
Originations, Purchases and Sales."
In underwriting one- to four-family residential real estate
loans, the Bank evaluates both the borrower's ability to make monthly
payments and the value of the property securing the loan. Properties
securing real estate loans made by the Bank are appraised either by in-
house appraisers or independent fee appraisers. The Bank requires
borrowers to obtain title insurance and fire and property insurance
(including flood insurance, if appropriate) in an amount not less than the
amount of the loan. Residential loans do not include prepayment penalties.
Real estate loans originated by the Bank contain a "due on sale" clause
allowing the Bank to declare the unpaid principal balance due and payable
upon the sale of the security property.
Residential mortgage loan originations are derived from a number
of sources, including advertising, direct solicitation, real estate broker
referrals, existing borrowers and depositors, builders and walk-in
customers. Loan applications are accepted at all of the Bank's offices.
The Bank employs commissioned loan originators to be more aggressive in
seeking mortgage originations in its market area.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING. The Bank has
engaged to a limited extent in commercial real estate and multi-family
lending. At June 30, 1996, the Bank had $1.8 million of commercial real
estate and multi-family loans, which represented 1.7% of the Bank's gross
loan portfolio. The vast majority of commercial real estate and multi-
family loans originated by the Bank are adjustable rate loans which
amortize over a 25-year period.
Commercial real estate and multi-family loans do not generally
exceed 75% of the appraised value of the property securing the loan. The
Bank analyzes the financial condition of the borrower, the borrower's
credit history, and the reliability and predictability of the net income
generated by the property securing the loan. The Bank generally requires
personal guarantees of the borrowers. Appraisals on properties securing
commercial real estate and multi-family loans originated by the Bank are
performed by independent fee appraisers approved by the Board of Directors.
The largest commercial real estate and multi-family loan
outstanding at June 30, 1996 was a $500,000 land acquisition and
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<PAGE>
development loan secured by the land and the single and multi-family
residences constructed thereon. At June 30, 1996, this loan was performing
in accordance with its terms.
Loans secured by commercial real estate and multi-family
properties are generally larger and involve a greater degree of credit risk
than one- to four-family residential mortgage loans. Commercial real
estate and multi-family loans typically involve large balances to single
borrowers or groups of related borrowers. Because payments on loans
secured by commercial real estate and multi-family properties are often
dependent on the successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real
estate market or the economy. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the borrower's
ability to repay the loan may be impaired.
CONSTRUCTION LENDING. The Bank makes construction loans to
individuals for the construction of their residences as well as to builders
for the construction of one- to four-family residences. At June 30, 1996,
all of these loans were secured by property located within the Bank's
market area. At June 30, 1996, the Bank had $6.7 million in construction
loans outstanding, representing 6.7% of the Bank's gross loan portfolio.
In 1995 the Bank began to utilize its commissioned loan originators to
increase its emphasis on construction lending. In this respect, the
commissioned loan originators originated $7.8 million of construction loans
during fiscal 1996, of which $5.8 million remained in the Bank's loan
portfolio at June 30, 1996.
Construction loans to individuals are structured to convert to
permanent loans at the end of the construction phase, which typically lasts
six months. These construction loans have rates and terms which match any
one- to four-family loans then offered by the Bank, except that during the
construction phase, the borrower pays interest only. Residential
construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans. At June 30,
1996, the Bank had $5.2 million of construction loans to borrowers
intending to live in the properties upon completion of construction.
Construction loans to builders of one- to four-family residences
generally have terms of up to six months and require the payment of
interest only at a fixed-rate for the loan term. The Bank generally limits
loans to builders for the construction of an unsold home to one home in
process per builder at any given time. At June 30, 1996, the Bank had $1.5
million of construction loans to builders of one- to four-family
residences.
Construction loans are obtained through continued business from
builders, as well as referrals from existing customers and walk-in
-38-
<PAGE>
customers. The application process includes a submission to the Bank of
accurate plans, specifications and costs of the construction project.
These items are used as a basis to determine the appraised value of the
subject property. Loans are based on the current appraised value. The
Bank requires personal financial statements from the builder.
Construction lending is generally considered to involve a higher
level of credit risk than one- to four-family residential lending since the
risk of loss on construction loans is dependent largely upon the accuracy
of the initial estimate of the individual property's value upon completion
of the project and the estimated cost (including interest) of the project.
If the cost estimate proves to be inaccurate, the Bank may be required to
advance funds beyond the amount originally committed to permit completion
of the project.
CONSUMER LENDING. The Bank considers consumer lending an
integral component of its lending operations. Consumer loans generally
have shorter terms to maturity (thus reducing the Bank's exposure to
changes in interest rates) and historically have carried higher rates of
interest than do one- to four-family residential mortgage loans, although
that is not always the case. In addition, management believes that the
offering of consumer loan products helps to expand and create stronger ties
to its existing customer base, by increasing the number of customer
relationships and providing cross-marketing opportunities. At June 30,
1996, the Bank's consumer loan portfolio totaled $24.7 million, or 23.8% of
its gross loan portfolio. The majority of such loans consists of indirect
and direct automobile paper, accounting for $16.1 million, or 15.6%, of the
total loan portfolio at June 30, 1996. Under applicable federal law, the
Bank is authorized to invest up to 35% of its assets in consumer loans.
The Bank offers a variety of secured consumer loans, including
automobile, boat, home equity, energy conservation loans, personal loans
secured by real estate, home improvement, mobile home, loans secured by
savings deposits and other consumer collateral. The Bank also offers a
limited amount of unsecured loans. The Bank generally originates consumer
loans in its market area. Consumer loan terms vary according to the type
of collateral and length of contract. The Bank's consumer loans have
either a fixed- or variable-rate of interest although fixed-rate lending
predominates.
The Bank is actively engaged in indirect dealer financing of
automobiles. Such indirect dealer loans are originated through a network
of approximately 10 automobile dealers located in, or in counties
contiguous to, the Bank's market area. The underwriting standards employed
by the Bank for indirect dealer loans are in accordance with the Bank's
general standards for underwriting consumer loans. The determination of
compliance with these standards is made by the Bank rather than by the
referring dealer. The Bank's automobile loans are originated at fixed
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<PAGE>
interest rates and are typically for terms of up to six years. At June 30,
1996, indirect dealer automobile loans totaled $14.1 million, or 57.1%, of
the Bank's total consumer loan portfolio. The Bank does not offer floor
plan lines of credit to automobile dealers.
At June 30, 1996, $2.3 million of the Bank's consumer loans
consisted of home equity line of credit loans. Home equity loans are
secured by second mortgages on owner-occupied, single-family residences.
The home equity loans generally have variable rates and typically carry
terms of ten years. At June 30, 1996, the Bank also had $2.7 million of
personal loans secured by real estate. These loans are underwritten
pursuant to the Bank's consumer lending guidelines, have fixed-rates, have
terms of up to ten years and are secured by either first or second
mortgages.
The Bank also originates energy conservation loans for the
purchase of home improvement items for energy conservation (I.E., heating
and cooling systems). These loans are fully guaranteed by the utility
company, however such guarantees are generally difficult to collect on due
to the rigidness of the wording contained in such guarantees. At June 30,
1996, guaranteed energy conservation loans totaled $1.3 million.
The underwriting standards employed by the Bank for consumer
loans include a determination of the applicant's payment history on other
debts and an assessment of the ability to meet existing obligations and
payments on the proposed loan. In addition, the stability of the
applicant's monthly income from primary employment is considered during the
underwriting process. Although creditworthiness of the applicant is the
primary consideration, the underwriting process also includes a comparison
of the value of the security, if any, in relation to the proposed loan
amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans that are
unsecured, or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation. In addition, consumer loan collections are dependent
on the borrower's continuing financial stability and thus are more likely
to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
While there can be no assurance that delinquencies or non-performing
consumer loans will not increase in the future, the level of delinquencies
over 90 days in the Bank's $24.7 million consumer loan portfolio was
$136,000, or .55% of such loans, at June 30, 1996.
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<PAGE>
LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank originated
$60.0 million of loans during fiscal 1996, compared to $39.5 million and
$41.5 million in fiscal 1995 and 1994, respectively. The increase in
mortgage loans during fiscal 1996 was the result of the lower interest rate
environment which continued to stimulate the origination of primarily
fixed-rate loans during the period. Mortgage loan originations are
underwritten by the employees of the Bank. The Bank employs commissioned
loan salespersons to originate loans.
While the Bank originates both adjustable-rate and fixed-rate
loans, its ability to originate loans is dependent upon the relative
customer demand for loans in its market. Demand is affected by the
interest rate environment. Pursuant to its asset/liability management
strategy, the Bank's policy during past years has been to sell fixed-rate
loan originations in the secondary market. Effective for the fiscal year
ended June 30, 1995, as part of its business plan, the Bank established
interest rate levels at or above which, 15-, 20- and 30-year, fixed-rate
mortgage loans were retained for its own portfolio. The Bank sold fixed-
rate loans in aggregate amounts of $5.8 million and $2.5 million for the
fiscal years ended June 30, 1996 and 1995, compared to $22.3 million during
fiscal 1994. From time to time, the Bank has sold such loans pursuant to
forward sales commitments in order to mitigate the interest rate risk of
loan originations. See "- One- to Four-Family Residential Mortgage
Lending."
When loans are sold, the Bank typically retains the
responsibility for servicing the loans. The Bank receives a servicing fee
for performing these services. The Bank serviced for others mortgage loans
amounting to $46.6 million at June 30, 1996. (See Note 5 of the Notes to
the Consolidated Financial Statements contained in the Annual Report to
Stockholders attached as Exhibit 13 to the Form 10-KSB (the "Annual
Report").)
-41-
<PAGE>
The following table shows the loan origination, sale and
repayment activities of the Bank for the periods indicated. In addition,
during 1996 the Bank purchased one $500,000 real estate development loan.
There were no loan purchases during the fiscal 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
Adjustable-rate:
Real estate - one to four-family . . . . . . . . . . . . . . . . $ 3,248 $13,506 $ 6,845
- multi-family and commercial real estate. . . . . . --- 1,024 ---
Non-real estate - consumer . . . . . . . . . . . . . . . . . . . 1,750 673 844
------- ------- -------
Total adjustable-rate. . . . . . . . . . . . . . . . . . . . . 4,998 15,203 7,689
------- ------- -------
Fixed-rate:
Real estate - one to four-family . . . . . . . . . . . . . . . . 42,419 7,030 23,456
- multi-family, commercial real estate and land. . . 335 65 ---
Non-real estate - consumer . . . . . . . . . . . . . . . . . . . 12,244 17,234 10,380
Total fixed-rate . . . . . . . . . . . . . . . . . . . . . . . 54,998 24,329 33,836
------- ------- -------
Total loans originated . . . . . . . . . . . . . . . . . . . . 59,996 39,532 41,525
------- ------- -------
SALES AND REPAYMENTS:
Real estate - one to four-family . . . . . . . . . . . . . . . . 5,839 2,471 22,331
------- ------- -------
Total loans sold . . . . . . . . . . . . . . . . . . . . . . . 5,839 2,471 22,331
Principal repayments . . . . . . . . . . . . . . . . . . . . . . 27,535 17,845 17,266
------- ------- -------
Total reductions . . . . . . . . . . . . . . . . . . . . . . . 33,374 20,316 39,597
Increase (decrease) in other items, net . . . . . . . . . . . . . 422 64 (374)
------- ------- -------
Net increase (decrease). . . . . . . . . . . . . . . . . . . . $27,044 $19,280 $ 2,302
======= ======= =======
</TABLE>
NON-PERFORMING ASSETS AND CLASSIFIED ASSETS. Generally, when a
borrower fails to make a required payment on real estate secured loans and
other loans the Bank institutes collection procedures by mailing a
delinquency notice. The customer is contacted again, by telephone, if the
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<PAGE>
delinquency is not promptly cured. In most cases, delinquencies are cured
promptly; however, if a loan secured by real estate has been delinquent for
more than 60 days, a notice is sent to the customer requesting a personal
interview to discuss their account and to make arrangements to bring the
loan current. At 90 days past due, the delinquency is reviewed with the
Board of Directors which generally directs management to send a letter of
default, and unless satisfactory arrangements are made to bring the loan
current by a stated date, foreclosure procedures are instituted. If a loan
secured by other collateral has been delinquent for more than 60 days, a
letter is sent demanding payment; at 90 days past due, a default notice is
sent and if the loan is 120 or more days delinquent and satisfactory
arrangements have not been made for repayment, immediate repossession
commences.
DELINQUENT LOANS. The following table sets forth the Bank's loan
delinquencies by type, by amount and by percentage of type at June 30,
1996.
<TABLE>
<CAPTION>
LOANS DELINQUENT FOR:
-------------------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL DELINQUENT LOANS
---------------------------- ---------------------------- ----------------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One to four- family. . . 1 $ 38 .05% 4 $175 .22% 5 $213 .27%
Consumer . . . . . . . . . 23 125 .50% 25 136 .54% 48 261 1.04%
-- ---- -- ---- -- ----
Total. . . . . . . . . 24 $163 .16% 29 $311 .30% 53 $474 .46%
== ==== == ==== == ====
</TABLE>
NON-PERFORMING ASSETS. The table below sets forth the amounts
and categories of non-performing assets in the Bank's loan portfolio.
Loans are placed on non-accrual status when the loan is delinquent 90 days
or greater. For all years presented, the Bank has had no troubled debt
restructurings (which involve forgiving a portion of interest or principal
on any loans or making loans at a rate materially less than that of market
rates) nor any accruing loans delinquent more than 90 days. Foreclosed
assets include assets acquired in settlement of loans.
-43-
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non accruing loans:
One- to four-family . . . . . . . . . . . . . . $175 $--- $--- $ 31 $129
Consumer. . . . . . . . . . . . . . . . . . . . 136 67 53 30 16
---- ---- ---- ---- ----
Total . . . . . . . . . . . . . . . . . . . . 311 67 53 61 145
---- ---- ---- ---- ----
Foreclosed assets:
One- to four-family . . . . . . . . . . . . . . 83 175 3 55 188
Consumer. . . . . . . . . . . . . . . . . . . . 30 14 12 --- 7
---- ---- ---- ---- ----
Total . . . . . . . . . . . . . . . . . . . . 113 189 15 55 195
---- ---- ---- ---- ----
Total non-performing assets. . . . . . . . . . . $424 $256 $ 68 $116 $340
==== ==== ==== ==== ====
Total as a percentage of total assets. . . . . . .28% .20% .06% .09% .26%
==== ==== ==== ==== ====
</TABLE>
For the year ended June 30, 1996, gross interest income which
would have been recorded had the non-accruing loans been current in
accordance with their original terms was immaterial.
OTHER LOANS OF CONCERN. As of June 30, 1996, there were no loans
not included in the table above where known information about the possible
credit problems of borrowers caused management to have doubts as to the
ability of the borrower to comply with present loan repayment terms and
which may result in disclosure of such loans in the future, except for
three consumer loans, aggregating $15,000, that were previously
restructured and 60 days or more past due at June 30, 1996.
CLASSIFIED ASSETS. Federal regulations provide for the
classification of loans and other assets, such as debt and equity
securities considered by the OTS to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
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<PAGE>
Assets classified as "doubtful" have all of the weaknesses inherent in
those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable
and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan
losses in an amount deemed prudent by management. General allowances
represent loss allowances which have been established to recognize the
inherent risk associated with lending activities, but which, unlike
specific allowances, have not been allocated to particular problem assets.
When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100%
of that portion of the asset so classified or to charge off such amount.
An institution's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the OTS,
which may order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the
OTS and in accordance with its classification of assets policy, the Bank
regularly reviews the problem assets in its portfolio to determine whether
any assets require classification in accordance with applicable
regulations. At June 30, 1996, the Bank had classified $265,000 as
substandard, none as doubtful and $174,000 as loss.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is
established through a provision for loan losses based on management's
evaluation of the risk inherent in its loan portfolio and changes in the
nature and volume of its loan activity. Such evaluation, which includes a
review of loans for which full collectibility may not be reasonably
assured, considers among other matters, the loan classifications discussed
above, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience, and other factors that warrant
recognition in providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded
at fair value. If fair value at the date of foreclosure is lower than the
balance of the related loan, the difference will be charged-off to the
allowance for loan losses at the time of transfer. Valuations are
periodically updated by management and if the value declines, a specific
provision for losses on such property is established by a charge to
operations.
-45-
<PAGE>
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
final determination. Future additions to the Bank's allowance will be the
result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an
integral part of the examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance level based upon their judgment of the
information available to them at the time of their examination. At
June 30, 1996, the Bank had a total allowance for loan losses of $646,000,
representing 208.4% of total non-performing loans. See "Management's
Discussion and Analysis - Results of Operations" in the Annual Report.
The following table sets forth an analysis of the Bank's
allowance for loan losses.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period . . . . $559 $572 $582
Charge-offs:
Consumer . . . . . . . . . . . . . . (126) (26) (19)
---- ---- ----
Total charge-offs. . . . . . . . . (126) (26) (19)
---- ---- ----
Recoveries:
Consumer . . . . . . . . . . . . . . 38 51 57
---- ---- ----
Total recoveries . . . . . . . . . 38 51 57
---- ---- ----
Net (charge-offs) recoveries . . . . . (88) 25 38
Provision charged (credited) to
operations . . . . . . . . . . . . . 175 (38) (48)
---- ---- ----
Balance at end of period . . . . . . . $646 $559 $572
==== ==== ====
-46-
<PAGE>
Ratio of net charge-offs during
the period to average loans
outstanding during the period. . . . .10% N/A N/A
Ratio of net charge-offs during
the period to average non-
performing assets. . . . . . . . . . 25.96% N/A N/A
</TABLE>
The distribution of the Bank's allowance for losses on loans at
the dates indicated is summarized in the following table. The portion of
the allowance allocated to each loan category does not necessarily
represent the total available for losses within that category since the
total allowance is applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------- --------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
LOAN IN EACH LOAN IN EACH LOAN IN EACH
AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS CATEGORY
LOAN LOSS BY TO TOTAL LOAN LOSS BY TO TOTAL LOAN LOSS BY TO TOTAL
ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family. . . . $166 $ 70,035 67.60% $154 $46,347 62.15% $154 $36,870 67.39%
Multi-family . . . . . . . --- 1,296 1.24 --- 874 1.17 --- 437 .80
Commercial real estate . . --- 466 .45 --- 536 .72 --- 553 1.01
Construction . . . . . . . --- 6,941 6.70 --- 2,736 2.67 --- 1,761 3.22
Consumer . . . . . . . . . 373 24,870 24.01 281 24,078 32.29 226 15,091 27.58
Unallocated. . . . . . . . 107 --- --- 124 --- --- 192 --- ---
---- -------- ------ ---- ------- ------ ---- ------- ------
Total. . . . $646 $103,598 100.00% $559 $74,571 100.00% $572 $54,712 100.00%
==== ======== ====== ==== ======= ====== ==== ======= ======
</TABLE>
INVESTMENT ACTIVITIES - GENERAL. The OTS has issued guidelines
regarding management oversight and accounting treatment for securities,
including investment securities, loans, mortgage-backed securities and
other derivative securities. The guidelines require thrift institutions to
reduce the carrying value of securities to the lesser of cost or market
value unless it can be demonstrated that a class of securities is intended
to be held to maturity. As of June 30, 1996, the Bank held $9.38 million
-47-
<PAGE>
and $3.67 million, respectively, of principal amount of mortgage-backed
securities and investment securities which the Bank intends to hold until
maturity. As of such date, these securities had a market value of $9.35
million and $3.63 million, respectively. At that date, the Bank also held
$26.83 million and $5.63 million of mortgage-backed securities and
investment securities, respectively, as available for sale. For further
information regarding the mortgage-backed securities and investment
securities and the accounting treatment for such securities, see Notes 3
and 4 of the Notes to the Consolidated Financial Statements in the Annual
Report.
MORTGAGE-BACKED SECURITIES. The Bank purchases mortgage-backed
securities to supplement loan production. The type of securities purchased
is based upon the Bank's asset/liability management strategy and balance
sheet objectives. Most of the mortgage-backed securities purchased by the
Bank over the last several years have had adjustable interest rates or
short or intermediate average lives to maturity, generally two to five
years. The Bank has invested primarily in federal agency securities,
principally Federal National Mortgage Association ("FNMA"), FHLMC and
Government National Mortgage Association ("GNMA").
The FNMA, FHLMC and GNMA certificates are modified pass-through
mortgage-backed securities that represent undivided interests in underlying
pools of fixed-rate, or certain types of adjustable-rate, single-family
residential mortgages issued by these government-sponsored entities which
provide the holder a guarantee of timely payments of interest and
principal.
The Bank also invests in collateralized mortgage obligations and
certain participating interests in real estate mortgage investment conduits
("REMICs") (hereinafter collectively referred to as "CMOs"). CMOs are
special types of pass-through certificates in which the stream of principal
and interest payments on the underlying mortgages or mortgage-backed
securities is used to create classes with different maturities and, in some
cases, amortization schedules, as well as a residual interest, with each
such class possessing different risk characteristics. Management believes
these securities may represent attractive alternatives relative to other
investments due to the wide variety of maturity and repayment options
available through such investments. However, these investments may also
expose the Bank to considerable risk of loss if they are not managed
effectively. The high risk nature of these products stem from their price
volatility, the high degree of technical expertise required to understand
how they behave in various interest-rate environments and prepayment
scenarios, and the lack of liquidity which may exist should the securities
need to be sold.
Some CMO instruments, like the ones the Bank purchases, are most
like debt instruments because these CMO instruments have stated principal
-48-
<PAGE>
amounts and traditionally defined interest-rate terms. Purchasers of
certain other CMO instruments are entitled to the excess, if any, of the
issuer's cash inflows, including reinvestment earnings, over the cash
outflows for debt service and administrative expenses. These CMO
instruments may include instruments designated as residual interests and
are thought to be "high risk" in that these CMO instruments could result in
the loss of a portion of the original investment. Cash flows from residual
interests are extremely sensitive to prepayments and, thus, contain a high
degree of interest-rate risk. The investment policy of the Bank does not
allow for the purchase of high risk CMOs. The Bank held $22.8 million of
CMOs at June 30, 1996. See Note 4 to the Notes to the Consolidated
Financial Statements in the Annual Report for additional information
regarding the amortized cost and estimated fair value of these securities.
The following table sets forth the expected lives of the Bank's
mortgage-backed securities at June 30, 1996. See Note 4 of the Notes to
the Consolidated Financial Statements in the Annual Report for information
regarding the classification and accounting treatment of the Bank's
mortgage-backed securities.
<TABLE>
<CAPTION>
------------------------------------------------------ JUNE 30, 1996
1 YEAR AFTER 1 THROUGH AFTER 5 YEARS OVER 10 BALANCE
OR LESS 5 YEARS THROUGH 10 YEARS OUTSTANDING
------- --------------- ------------- ------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FHLMC. . . . . . . . . $1,990 $ 7,730 $ 991 $5,223 $15,934
FNMA . . . . . . . . . --- 8,106 6,539 738 15,383
GNMA . . . . . . . . . --- 2,864 2,030 --- 4,894
Other. . . . . . . . . --- --- --- --- ---
------ ------- ------ ------ -------
Total. . . . . . . $1,990 $18,700 $9,554 $5,962 $36,211
====== ======= ====== ====== =======
</TABLE>
The following table shows the mortgage-backed securities
purchase, sale and repayment activities of the Bank for the periods
indicated.
-49-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------------
1996 1995 1994
--------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Purchases. . . . . . . . . . . $ 14,556 $ 4,920 $ 18,609
Sales. . . . . . . . . . . . . (10,833) (4,974) (20,369)
Repayments . . . . . . . . . . (4,186) (6,596) (14,129)
Other. . . . . . . . . . . . . 609 380 (2,390)
-------- ------- --------
Net increase (decrease). . . . $ 146 $(6,270) $(18,279)
======== ======= ========
</TABLE>
INVESTMENT SECURITIES. The Bank must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations. Liquidity
may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, the Bank has maintained liquid assets at levels above the
minimum requirements imposed by the OTS regulations and above levels
believed adequate to meet the requirements of normal operations, including
potential deposit outflows. Cash flow projections are regularly reviewed
and updated to assure that adequate liquidity is maintained. At June 30,
1996, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 5.9%. The Bank's
level of liquidity is a result of management's asset/liability strategy.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" and "- Liquidity and
Capital Resources" in the Annual Report.
Federally chartered savings institutions have the authority to
invest in various types of liquid assets, including U.S. Treasury
obligations, securities of various federal agencies, certain certificates
of deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest
their assets in investment grade commercial paper and corporate debt
securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. See "Regulation - Federal Regulation of Savings
Associations" for a discussion of restrictions on the Bank's investment
activities.
-50-
<PAGE>
The following table sets forth the composition of the Bank's
investment portfolio and mortgage-backed securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
BOOK % OF BOOK % OF BOOK % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Federal agency obligations . . . . . . . . . $ 9,235 88.07% $13,965 93.78% $11,780 92.71%
Equity securities. . . . . . . . . . . . . . 63 .60 62 .42 62 .49
------- ------ ------- ------ ------- ------
Subtotal . . . . . . . . . . . . . . . . . 9,298 88.67 14,027 94.20 11,842 93.20
FHLB stock. . . . . . . . . . . . . . . . . . 1,188 11.33 864 5.80 864 6.80
------- ------ ------- ------ ------- ------
Total investment securities and FHLB
stock. . . . . . . . . . . . . . . . . . $10,486 100.00% $14,891 100.00% $12,706 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of investment
securities . . . . . . . . . . . . . . . . . 2.8 years 2.9 years 6.4 years
Other interest-earning assets:
Interest-bearing deposits with banks . . . . 190 100.00% $ 190 100.00% $ 190 100.00%
------- ------ ------- ------ ------- ------
Total. . . . . . . . . . . . . . . . . . . $ 190 100.00% $ 190 100.00% $ 190 100.00%
======= ====== ======= ====== ======= ======
Mortgage-backed securities:
GNMA . . . . . . . . . . . . . . . . . . . . $ 2,399 6.62 $ 2,996 8.31 $ 4,159 9.82
FNMA . . . . . . . . . . . . . . . . . . . . 7,954 21.97 7,175 19.89 8,643 20.42
FHLMC. . . . . . . . . . . . . . . . . . . . 2,692 7.43 5,805 16.10 9,049 21.37
CMOs/REMICS. . . . . . . . . . . . . . . . . 22,790 62.94 19,948 55.31 20,157 47.61
------- ------ ------- ------ ------- ------
Total. . . . . . . . . . . . . . . . . . . 35,835 98.96 35,924 99.61 42,007 99.22
Unamortized premium, net. . . . . . . . . . . 376 1.04 141 .39 328 .78
------- ------ ------- ------ ------- ------
Total mortgage-backed securities . . . . . $36,211 100.00% $36,065 100.00% $42,335 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
-51-
<PAGE>
The composition and maturities of the investment securities
portfolio, excluding equity securities and FHLB stock, are indicated in the
following table.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------------------------
1 YEAR AFTER 1 AFTER 5 OVER
OR YEAR TO YEARS TO 10 TOTAL INVESTMENT
LESS 5 YEARS 10 YEARS YEARS SECURITIES
------ ------- -------- ----- -----------------
BOOK BOOK BOOK BOOK BOOK FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
------ ------- -------- ----- ----- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations $ 500 $6,571 $2,214 $ 450 $9,235 $9,198
----- ------ ------ ----- ------ ------
Total investment securities $ 500 $6,571 $2,214 $ 450 $9,235 $9,198
===== ====== ====== ===== ====== ======
Weighted average yield . . . . . . 5.80% 5.12% 6.76% 7.59% 5.64% ---
</TABLE>
The Bank's investment securities portfolio and mortgage-backed
securities portfolio at June 30, 1996 contained neither tax-exempt
securities nor securities of any issuer with an aggregate book value in
excess of 10% of the Bank's retained earnings, excluding those issued by
the U.S. Government or its agencies.
SOURCES OF FUNDS. The Bank's primary sources of funds are
deposits, payment of principal and interest on loans and mortgage-backed
securities, sale of loans and mortgage-backed securities, interest earned
on or maturation and sale of investment securities, funds provided from
operations and borrowings.
The Bank offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of passbook and
statement savings accounts, NOW and non-interest-bearing checking accounts,
and money market and certificate accounts. The Bank relies primarily on
advertising, competitive pricing policies and customer service to attract
and retain these deposits. The Bank solicits deposits from its market area
only. The Bank does not currently use brokers to obtain deposits although
it did so in the mid 1980s.
The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing interest rates
-52-
<PAGE>
and competition. The variety of deposit accounts offered by the Bank has
allowed it to be competitive in obtaining funds and to respond with
flexibility to changes in consumer demand. The Bank has become more
susceptible to short-term fluctuations in deposit flows, as customers have
become more interest rate conscious. The Bank manages the pricing of its
deposits in keeping with its asset/liability management, liquidity and
growth objectives. Based on its experience, the Bank believes that its
savings and interest and non-interest-bearing checking accounts are
relatively stable sources of deposits. However, the ability of the Bank to
attract and maintain CDS, and the rates paid on these deposits, has been
and will continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Bank
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Opening balance . . . . . . . . $106,294 $108,847 $108,387
Net increase (decrease) . . . . $ 1,634 $ (2,553) $ 460
-------- -------- --------
Ending balance. . . . . . . . . $107,928 $106,294 $108,847
======== ======== ========
Percent increase (decrease) . . 1.51% (2.4)% .42%
==== ==== ===
</TABLE>
The following table indicates the amount of the Bank's
certificates of deposit and other deposits by time remaining until maturity
as of June 30, 1996.
-53-
<PAGE>
<TABLE>
<CAPTION>
MATURITY
--------------------------------------------
OVER OVER
3 MONTHS 3 TO 6 6 TO 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
-------- ------ ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000. . . $14,380 $ 9,632 $22,250 $20,099 $66,361
Certificates of deposit of $100,000 or more . . 1,300 1,000 3,782 5,831 11,913
Public funds <F1> . . . . . . . . . . . . . . . 1,543 411 518 219 2,691
------- ------- ------- ------- -------
Total certificates of deposit . . . . . . . . . $17,223 $11,043 $26,550 $26,149 $80,965
======= ======= ======= ======= =======
____________________________
<FN>
<F1> Deposits from governmental and other public entities.
</FN>
</TABLE>
BORROWINGS. Savings deposits have historically been the Bank's
primary source of funds. The Bank's other available sources of funds
include advances from the FHLB of Indianapolis and other borrowings. As a
member of the FHLB of Indianapolis, the Bank is required to own capital
stock in the FHLB and is authorized to apply for advances from the FHLB.
Each FHLB credit program has its own interest rate, which may be fixed or
variable, and range of maturities. The FHLB of Indianapolis may prescribe
the acceptable uses for these advances, as well as limitations on the size
of the advances and repayment provisions. At June 30, 1996, the Bank had
FHLB advances totaling $23.8 million.
In 1988, the Bank incorporated SJS Capital Corporation ("SJS
Capital") for the purpose of issuing a CMO to various investors. In
November 1988, the financing subsidiary issued a CMO with a total par value
of $20.8 million comprised of five classes with different stated maturity
dates ranging from April 1993 to January 2020. The net proceeds of the CMO
offering amounted to $18.8 million, reflecting issuance costs and the
original issue discount. The collateral and source of cash flows for the
principal and interest payments on the CMO consisted of certain mortgage-
backed securities transferred from the Bank to the financing subsidiary.
As a result of the lower interest rate environment prevailing since 1988,
the mortgage-backed securities that were used to collateralize the CMO paid
off faster than originally projected, and the CMO balance was likewise
-54-
<PAGE>
reduced in advance of the original schedule of stated maturities. In June
1994, the remaining outstanding classes of the CMO with a balance of $3.3
million were extinguished and the corresponding collateral was sold to
finance the transaction. See Note 9 of the Notes to the Consolidated
Financial Statements in the Annual Report for additional information
concerning the CMO.
The following table sets forth the maximum month-end balance and
average balance of the Bank's CMO and other borrowings for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1995 1994
------- ------ ------
(In Thousands)
<S> <C> <C> <C>
MAXIMUM BALANCE:
CMO borrowing . . . . . . . . . . . . . . --- --- $7,033
Other borrowings (FHLB advances). . . . . $23,750 $5,000 ---
AVERAGE BALANCE:
CMO borrowing . . . . . . . . . . . . . . --- --- $4,808
Other borrowings (FHLB advances). . . . . $15,679 $3,105 ---
</TABLE>
The following table sets forth certain information as to the
Bank's borrowings at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1996 1995 1994
------- ------ ------
(Dollors In Thousands)
<S> <C> <C> <C>
CMO borrowings. . . . . . . . . . . . . . . $ --- $ --- $---
Other borrowings (FHLB advances). . . . . . 23,750 4,500 ---
------- ------ ----
Total borrowings. . . . . . . . . . . . . $23,750 $4,500 $---
======= ====== ====
Weighted average interest rate. . . . . . . 5.94% 6.09% ---%
</TABLE>
-55-
<PAGE>
SUBSIDIARY AND OTHER ACTIVITIES. Federal associations generally
may invest up to 2% of their assets in service corporations, plus an
additional 1% of assets for community purposes. In addition, federal
associations may invest up to 50% of their total capital in conforming
loans to their service corporations in which they own more than 10% of
the capital stock. Federal associations are also permitted to invest an
nlimited amount in operating subsidiaries engaged solely in activities
which a federal association may engage in directly.
SJS has two wholly owned service corporation subsidiaries, SJS
Financial Corporation ("SJS Financial") and SJS Capital. SJS Financial was
formed in 1988 to engage in re-insurance activity through a relationship
with Minnesota Mutual Life Insurance Company and has engaged in no other
operations since its formation. At June 30, 1996, SJS's investment in its
service corporation totaled $112,000. For a discussion on SJS Capital, see
"Source of Funds - Borrowings" above and Note 9 of Notes to Consolidated
Financial Statements in the Annual Report.
COMPETITION
SJS faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from other savings institutions, commer-
cial banks, credit unions and mortgage bankers making loans secured by
real estate located in Berrien, Van Buren, Allegan and Cass Counties, the
Bank's market area. Other savings institutions, commercial banks, credit
unions and finance companies provide vigorous competition in consumer
lending.
The Bank attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from other savings
institutions, commercial banks and credit unions located in the same
communities, as well as mutual funds. The Bank competes for these deposits
by offering a variety of deposit accounts at competitive rates, convenient
business hours, and convenient branch locations with interbranch deposit
and withdrawal privileges.
EMPLOYEES
At June 30, 1996, the Bank had a total of 51 employees, including
10 part-time and contract employees. The Bank's employees are not repre-
sented by any collective bargaining group. Management considers its
employee relations to be good.
REGULATION
GENERAL. The Bank is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and
-56-
<PAGE>
credit of the United States Government. Accordingly, the Bank is subject
to broad federal regulation and oversight extending to all its operations.
The Bank is a member of the FHLB of Indianapolis and is subject to certain
limited regulation by the Federal Reserve Board. As the savings and loan
holding company of the Bank, SJS also is subject to federal regulation and
oversight. The purpose of the regulation of SJS and other holding
companies is to protect subsidiary savings associations. The Bank is a
member of the SAIF which together with the Bank Insurance Fund (the "BIF")
are the two deposit insurance funds administered by the FDIC, and the
deposits of the Bank are insured by the FDIC. As a result, the FDIC has
certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this Proxy Statement.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has exten-
sive authority over the operations of savings associations. As part of
this authority, the Bank is required to file periodic reports with the
OTS and is subject to periodic examinations by the OTS and the FDIC.
The last regular OTS and FDIC examinations of the Bank were as of
March 31, 1996 and April 8, 1991, respectively. Under agency scheduling
guidelines, it is likely that another examination will be initiated in
the near future. When these examinations are conducted by the OTS and
the FDIC, the examiners generally have the authority to require the Bank
to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon
the savings association's total assets, to fund the operations of the OTS.
The Bank's OTS assessment for the fiscal year ended June 30, 1996 was
approximately $41,000.
The OTS also has extensive enforcement authority over all
savings institutions and their holding companies, including the Bank
and SJS. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or
removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regula-
tions and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untime-
ly reports filed with the OTS. Except under certain circumstances,
public disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority
of the Bank is prescribed by federal laws and regulations, and it is
prohibited from engaging in any activities not permitted by such laws and
regulations. For instance, no savings institution may invest in non-
investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-
residential real property may not exceed 400% of total capital, except
-57-
<PAGE>
with approval of the OTS. Federal savings associations are also general-
ly authorized to branch nationwide. The Bank is in compliance with the
noted restrictions.
The Bank's general permissible lending limit for loans-to-one-
borrower is equal to the greater of $500,000 or 15% of unimpaired capital
and surplus (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired
capital and surplus). At June 30, 1996, the Bank's lending limit under
this restriction was $2.1 million. The Bank is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has
adopted guidelines establishing safety and soundness standards on matters
such as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk expo-
sure and compensation and other employee benefits. Any institution which
fails to comply with these standards must submit a capital compliance
plan. A failure to submit a plan or to comply with an approved plan will
subject the institution to further enforcement action.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is
a member of the SAIF, which is administered by the FDIC. Deposits are
insured up to applicable limits by the FDIC and such insurance is backed by
the full faith and credit of the United States Government. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It
also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF and the BIF. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums,
ranging from .23% to .31% of deposits, based upon their level of capital
and supervisory evaluation. Under the system, institutions classified as
well capitalized (I.E., a core capital ratio of at least 5%, a ratio of
Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%)
and considered healthy pay the lowest premium while institutions that are
less than adequately capitalized (I.E., core or Tier 1 risk-based capital
ratios of less than 4% or a risk-based capital ratio of less than 8%) and
considered of substantial supervisory concern pay the highest premium.
Risk classification of all insured institutions will be made by the FDIC
for each semi-annual assessment period.
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The FDIC is authorized to increase assessment rates, on a semi-
annual basis, if it determines that the reserve ratio of the SAIF will be
less than the designated reserve ratio of 1.25% of SAIF insured deposits.
In setting these increased assessments, the FDIC must seek to restore the
reserve ratio to that designated reserve level, or such higher reserve
ratio as established by the FDIC. The FDIC may also impose special
assessments on SAIF members to repay amounts borrowed from the United
States Treasury or for any other reason deemed necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust
the insurance premium rates for banks that are insured by the Bank Insur-
ance Fund (the "BIF") of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. The FDIC has revised the
premium schedule for BIF-insured institutions to provide a range of .04%
to .31% of deposits in anticipation of the BIF achieving its statutory
reserve ratio. As a result, such institutions will generally pay lower
premiums. The revisions became effective in the third quarter of 1995.
The SAIF is not expected to attain the designated reserve ratio
until the year 2002 due to the shrinking deposit base for SAIF assess-
ments and the requirement that SAIF premiums be used to make the interest
payments on bonds issued by the Financing Corporation ("FICO") in order
to finance the costs of resolving thrift failures in the 1980s. As a re-
sult, SAIF members will generally be subject to higher deposit insurance
premiums than BIF members until, all things being equal, the SAIF attains
the required reserve ratio.
The effect of this disparity on the Bank and other SAIF members
is uncertain at this time. It may have the effect of permitting banks to
offer loan and deposit products on more attractive terms than SAIF members
due to the cost savings achieved through lower deposit premiums, thereby
placing SAIF members at a competitive disadvantage. A number of proposals
are being considered to recapitalize the SAIF in order to eliminate this
disparity. One plan currently being considered by the Treasury Department,
the FDIC, the OTS and the Congress provides for a one-time assessment,
anticipated to be approximately .70%, to be imposed on all deposits
assessed at the SAIF rates as of March 31, 1995, including those held by
commercial banks, and for BIF deposit insurance premiums to be used to pay
the FICO bond interest on a pro rata basis together with SAIF premiums.
The BIF and SAIF would be merged into one fund as soon as practicable, but
no later than January 1, 1998. There can be no assurance that any
particular proposal will be implemented or that premiums for either BIF or
SAIF members will not be adjusted in the future by the FDIC or by
legislative action.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital)
requirement and a risk-based capital requirement applicable to such savings
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associations. Generally, these capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The
OTS is also authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least
1.5% of adjusted total assets (as defined by regulation). Tangible capi-
tal generally includes common stockholders' equity and retained income,
and certain noncumulative perpetual preferred stock and related income.
In addition, all intangible assets, other than a limited amount of
purchased mortgage servicing rights, must be deducted from tangible capi-
tal. At June 30, 1996, the Bank did not have any intangible assets.
The OTS regulations establish special capitalization require-
ments for savings associations that own subsidiaries. In determining com-
pliance with the capital requirements, all subsidiaries engaged solely in
activities permissible for national banks or engaged in certain other
activities solely as agent for its customers are "includable" subsidiaries
that are consolidated for capital purposes in proportion to the associa-
tion's level of ownership. For excludable subsidiaries the debt and equi-
ty investments in such subsidiaries are deducted from assets and capital,
with a five-year transition period beginning on July 1, 1990,for invest-
ments made before April 12, 1989. The Bank's subsidiary is an includable
subsidiary.
At June 30, 1996, the Bank had tangible capital of $14.3
million, or 9.4% of adjusted total assets, which is approximately $12.0
million above the minimum requirement of 1.5% of adjusted total assets in
effect on that date.
The capital standards also require core capital equal to at
least 3% of adjusted total assets. Core capital generally consists of
tangible capital plus certain intangible assets, including a limited
amount of purchased credit card relationships. As a result of the prompt
corrective action provisions discussed below, however, a savings associa-
tion must maintain a core capital ratio of at least 4% to be considered
adequately capitalized unless its supervisory condition is such to allow
it to maintain a 3% ratio. At June 30, 1996, the Bank had no intangibles
which were subject to these tests.
At June 30, 1996, the Bank had core capital equal to $14.3
million, or 9.4% of adjusted total assets, which is $8.2 million above the
minimum leverage ratio requirement of 4% as in effect on that date.
The OTS risk-based requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan
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and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement
only to the extent of core capital. The OTS is also authorized to require
a savings association to maintain an additional amount of total capital to
account for concentration of credit risk and the risk of non-traditional
activities. At June 30, 1996, the Bank had no capital instruments that
qualify as supplementary capital and $646,000 of general loss reserves,
which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be
made for the purpose of calculating total capital. Such exclusions con-
sist of equity investments (as defined by regulation) and that portion of
land loans and nonresidential construction loans in excess of an 80% loan-
to-value ratio and reciprocal holdings of qualifying capital instruments.
The Bank had no such exclusions from capital and assets at June 30, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk
weight, ranging from 0% to 100%, based on the risk inherent in the type of
asset. For example, the OTS has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage
loans not more than 90 days delinquent and having a loan to value ratio of
not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or FHLMC.
On June 30, 1996, the Bank had total risk-based capital of $14.7
million (including approximately $14.3 million in core capital and no
qualifying supplementary capital, and risk-weighted assets of $75.3 million
(with no converted off-balance sheet assets); or total capital of 19.5% of
risk-weighted assets. This amount was $8.7 million above the 8%
requirement in effect on that date.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct
from its total capital, for purposes of determining compliance with such
requirement, an amount equal to 50% of its interest-rate risk exposure
multiplied by the present value of its assets. This exposure is a measure
of the potential decline in the net portfolio value of a savings
association, greater than 2% of the present value of its assets, based upon
a hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the
present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital.
The rule will not become effective until the OTS evaluates the process by
which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets
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and a total capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" in the Annual Report for information regarding the effect of
this rule on the Bank.
The OTS and the FDIC are authorized and, under certain
circumstances required, to take certain actions against savings
associations that fail to meet their capital requirements. The OTS is
generally required to take action to restrict the activities of an
"undercapitalized association" (generally defined to be one with less than
either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or
an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the OTS may
not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional
restrictions, discussed below, that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan,
any company controlling an undercapitalized association must agree that it
will enter into a limited capital maintenance guarantee with respect to
the institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital
plan or is "significantly undercapitalized" (I.E., Tier 1 risk-based or
core capital ratios of less than 3% or a risk-based capital ratio of less
than 6%) must be made subject to one or more of additional specified
actions and operating restrictions which may cover all aspects of its
operations and include a forced merger or acquisition of the association.
An association that becomes "critically undercapitalized" (I.E., a
tangible capital ratio of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to
significantly undercapitalized associations. In addition, the OTS must
appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after
it becomes critically undercapitalized. Any undercapitalized association
is also subject to the general enforcement authority of the OTS and the
FDIC, including the appointment of a conservator or a receiver.
The imposition by the OTS or the FDIC of any of these measures
on the Bank may have a substantial adverse effect on the Bank's operations
and profitability and the value of the SJS Common Stock purchased in the
Conversion. Company shareholders do not have preemptive rights, and
therefore, if SJS is directed by the OTS or the FDIC to issue additional
shares of SJS Common Stock, such issuance may result in the dilution in the
percentage of ownership of SJS of those persons purchasing shares in the
Conversion.
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LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS
regulations impose various restrictions or requirements on associations
with respect to their ability to pay dividends or make other distributions
of capital. OTS regulations prohibit an association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result,
the regulatory capital of the association would be reduced below the amount
required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations,
based on their capital level and supervisory condition, to make capital
distributions which include dividends, stock redemptions or repurchases,
cash-out mergers and other transactions charged to the capital account.
See "- Regulatory Capital Requirements."
Generally, Tier 1 associations, which are associations that
before and after the proposed distribution meet their fully phased-in
capital requirements, may make capital distributions during any calendar
year equal to the greater of 100% of net income for the year-to-date plus
50% of the amount by which the lesser of the association's tangible, core
or risk-based capital exceeds its fully phased-in capital requirement for
such capital component, as measured at the beginning of the calendar year,
or the amount authorized for a Tier 2 association. However, a Tier 1
association deemed to be in need of more than normal supervision by the OTS
may be downgraded to a Tier 2 or Tier 3 association as a result of such a
determination. The Bank meets the requirements for a Tier 1 association
and has not been notified of a need for more than normal supervision.
Tier 2 associations, which are associations that before and after the
proposed distribution meet their current minimum capital requirements, may
make capital distributions of up to 75% of net income over the most recent
four quarter period.
Tier 3 associations (which are associations that do not meet
current minimum capital requirements) that propose to make any capital
distribution and Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor level must obtain OTS
approval prior to making such distribution. Tier 2 associations proposing
to make a capital distribution within the safe harbor provisions and
Tier 1 associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. As a
subsidiary of SJS, the Bank will also be required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may object
to the distribution during that 30-day period based on safety and
soundness concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current
capital distribution restrictions. The proposal eliminates the current
tiered structure and the safe-harbor percentage limitations. Under the
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proposal a savings association may make a capital distribution without
notice to the OTS (unless it is a subsidiary of a holding company) provided
that it has a CAMEL 1 or 2 rating, is not in troubled condition and would
remain adequately capitalized (as defined in the OTS prompt corrective
action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must
notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings
association may not make a capital distribution without prior approval of
the OTS and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. As under the current rule, the OTS may object to a
capital distribution if it would constitute an unsafe or unsound practice.
No assurance may be given as to whether or in what form the regulations may
be adopted.
LIQUIDITY. All savings associations, including the Bank, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
For a discussion of what the Bank includes in liquid assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in the Annual Report. This
liquid asset ratio requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (E.G., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's
average daily balance of net withdrawable deposit accounts and current
borrowings. Penalties may be imposed upon associations for violations of
either liquid asset ratio requirement. At June 30, 1996, the Bank was in
compliance with both requirements, with an overall liquid asset ratio of
7.1% and a short-term liquid assets ratio of 3.4%.
ACCOUNTING. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of
a savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance
with GAAP. Under the policy statement, management must support its
classification of and accounting for loans and securities (I.E., whether
held for investment, sale or trading) with appropriate documentation.
The OTS has adopted an amendment to its accounting regulations,
whichvmay be made more stringent than GAAP by the OTS, to require that
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transactions be reported in a manner that best reflects their underlying
economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the
OTS. The Bank is in compliance with these amended rules.
QUALIFIED THRIFT LENDER TEST. All savings associations,
including the Bank, are required to meet a qualified thrift lender ("QTL")
test to avoid certain restrictions on their operations. This test
requires a savings association to have at least 65% of its portfolio
assets (which consists of total assets less intangibles, properties used
to conduct the savings association's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. Such
assets primarily consist of residential housing related loans and
investments. At June 30, 1996, the Bank met the test and has always met
the test since its effectiveness.
Any savings association that fails to meet the QTL test must
convert to a national bank charter, unless it requalifies as a QTL and
thereafter remains a QTL. If an association does not requalify and
converts to a national bank charter, it must remain SAIF-insured until the
FDIC permits it to transfer to the Bank Insurance Fund. If an association
that fails the test has not yet requalified and has not converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition,
the association is immediately ineligible to receive any new FHLB
borrowings and is subject to national bank limits for payment of
dividends. If such association has not requalified or converted to a
national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank.
In addition, it must repay promptly any outstanding FHLB borrowings, which
may result in prepayment penalties. If any association that fails the QTL
test is controlled by a holding company, then within one year after the
failure, the holding company must register as a bank holding company and
become subject to all restrictions on bank holding companies. See
"- Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment
Act ("CRA"), every FDIC insured institution has a continuing and
affirmative obligation consistent with safe and sound banking practices to
help meet the credit needs of its entire community, including low and
moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with the
examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
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evaluation of certain applications, such as a merger or the establishment
of a branch, by the Bank. An unsatisfactory rating may be used as the
basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently
revised the CRA regulations and the methodology for determining an
institution's compliance with the CRA. Due to the heightened attention
being given to the CRA in the past few years, the Bank may be required to
devote additional funds for investment and lending in its local community.
The Bank was examined for CRA compliance in May 1995 and received a rating
of "satisfactory."
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a
savings association or its subsidiaries and its affiliates are required to
be on terms as favorable to the association as transactions with non-
affiliates. In addition, certain of these transactions are restricted to
a percentage of the association's capital. Affiliates of the Bank include
SJS and any company which is under common control with the Bank. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Bank's subsidiary is not deemed to be
an affiliate, however; the OTS has the discretion to treat subsidiaries of
savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling
persons are also subject to conflict of interest regulations enforced by
the OTS. These conflict of interest regulations and other statutes also
impose restrictions on loans to such persons and their related interests.
Among other things, such loans must be made on terms substantially the
same as for loans to unaffiliated individuals.
HOLDING COMPANY REGULATION. SJS is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, SJS
is registered with and files reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has
enforcement authority over SJS and its non-savings association subsidiaries
which also permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, SJS generally is
not subject to activity restrictions. If SJS acquires control of another
savings association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of SJS and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
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If the Bank fails the QTL test, SJS must obtain the approval of
the OTS prior to continuing after such failure, directly or through its
other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure SJS must register as, and will
become subject to, the restrictions applicable to bank holding companies.
The activities authorized for a bank holding company are more limited than
are the activities authorized for a unitary or multiple savings and loan
holding company. See "- Qualified Thrift Lender Test."
SJS must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authoriza-
tion or in a supervisory acquisition of a failing savings association.
FEDERAL SECURITIES LAW. The stock of SJS is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). SJS is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of SJS may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If SJS meets specified current public information
requirements, each affiliate of SJS is able to sell in the public market,
without registration, a limited number of shares in any three-month
period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at
specified levels against their transaction accounts (primarily checking,
NOW and Super NOW checking accounts). At June 30, 1996, the Bank was in
compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy liquidity requirements that may be imposed by the OTS. See
"- Liquidity."
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations
require associations to exhaust other reasonable alternative sources of
funds, including FHLB borrowings, before borrowing from the Federal Reserve
Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB
of Indianapolis, which is one of 12 regional FHLBs, that administers the
home financing credit function of savings associations. Each FHLB serves
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as a reserve or central bank for its members within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (I.E.,
advances) in accordance with policies and procedures established by the
board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances
are required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock
in the FHLB of Indianapolis. At June 30, 1996, the Bank had approximately
$1.2 million of FHLB stock, which was in compliance with this requirement.
Under federal law the FHLBs are required to provide funds for
the resolution of troubled savings associations and to contribute to low-
and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected
adversely the level of FHLB dividends paid and could continue to do so in
the future. These contributions could also have an adverse effect on the
value of FHLB stock in the future. A reduction in value of the Bank's FHLB
stock may result in a corresponding reduction in the Bank's capital.
FEDERAL AND STATE TAXATION. Savings associations such as the
Bank that met certain definitional tests relating to the composition of
assets and other conditions prescribed by the Internal Revenue Code of
1986, as amended (the "Code"), were permitted to establish reserves for
bad debts and to make annual additions thereto which could, within
specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes for taxable years ending prior to
January 1, 1996. The amount of the bad debt reserve deduction for "non-
qualifying loans" was computed under the experience method. The amount
of the bad debt reserve deduction for "qualifying real property loans"
(generally loans secured by improved real estate) could be computed under
either the experience method or the percentage of taxable income method
(based on an annual election). Under the experience method, the bad debt
reserve deduction was an amount determined under a formula based generally
upon the bad debts actually sustained by the savings association over a
period of years.
The percentage of specially computed taxable income that was
used to compute a savings association's bad debt reserve deduction under
the percentage of taxable income method (the "percentage bad debt
deduction") was 8%. The percentage bad debt deduction thus computed was
reduced by the amount permitted as a deduction for non-qualifying loans
under the experience method. The availability of the percentage of
taxable income method permitted qualifying savings associations to be
taxed at a lower effective federal income tax rate than that applicable to
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corporations generally (approximately 31.3% assuming the maximum
percentage bad debt deduction).
Under the percentage of taxable income method, the percentage
bad debt deduction could not exceed the amount necessary to increase the
balance in the reserve for "qualifying real property loans" to an amount
equal to 6% of such loans outstanding at the end of the taxable year or the
greater of (i) the amount deductible under the experience method or (ii)
the amount which when added to the bad debt deduction for "non-qualifying
loans" equaled the amount by which 12% of the amount comprising savings
accounts at year end exceeded the sum of surplus, undivided profits and
reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the above-
described reserve method of accounting (including the percentage of taxable
income method) used by many thrift institutions to calculate their bad debt
reserve for federal income tax purposes. Thrift institutions with $500
million or less in assets may, however, continue to use the experience
method. As a result, the Bank must recapture that portion of the reserve
that exceeds the amount that could have been taken under the experience
method for post-1987 tax years. At June 30, 1996, the Bank's post-1987
excess reserves amounted to approximately $508,000. The recapture will
occur over a six-year period, the commencement of which will be delayed
until the first taxable year beginning after December 31, 1997, provided
the institution meets certain residential lending requirements. The
legislation also requires thrift institutions to account for bad debts for
federal income tax purposes on the same basis as commercial banks for tax
years beginning after December 31, 1995.
In addition to the regular federal income tax, corporations,
including savings associations such as the Bank, generally are subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax rate
of 20% on alternative minimum taxable income, which is the sum of a
corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. The alternative minimum
tax is imposed to the extent it exceeds the corporation's regular income
tax and net operating losses can offset no more than 90% of alternative
minimum taxable income. For taxable years beginning after 1986 and before
1996, corporations, including savings associations such as the Bank, are
also subject to an environmental tax equal to 0.12% of the excess of
alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax)
over $2 million.
To the extent earnings appropriated to a savings association's
bad debt reserves for "qualifying real property loans" and deducted for
federal income tax purposes exceed the allowable amount of such reserves
computed under the experience method and to the extent of the associa-
tion's supplemental reserves for losses on loans ("Excess"), such Excess
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may not, without adverse tax consequences, be utilized for the payment of
cash dividends or other distributions to a shareholder (including
distributions on redemption, dissolution or liquidation) or for any other
purpose (except to absorb bad debt losses).
The Bank and its subsidiary file consolidated federal income tax
returns on a fiscal year basis ending June 30 using the accrual method of
accounting. SJS intends to file consolidated federal income tax returns
with the Bank and its subsidiary. Savings associations, such as the Bank,
that file federal income tax returns as part of a consolidated group are
required by applicable Treasury regulations to reduce their taxable income
for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.
The Bank and its consolidated subsidiary have not been audited
by the IRS recently with respect to consolidated federal income tax
returns. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or
entities merged into, the Bank) would not result in a deficiency which
could have a material adverse effect on the financial condition of the
Bank and its consolidated subsidiary.
MICHIGAN TAXATION. The State of Michigan imposes a tax on
intangible personal property in the amount of $0.20 per $1,000 of deposits
of a savings bank or a savings and loan institution less deposits owed to
the federal or Michigan state governments, their agencies or certain other
financial institutions. The State of Michigan also imposes a "Single
Business Tax." The Single Business Tax is a value-added type of tax and is
for the privilege of doing business in the State of Michigan. The major
components of the Single Business Tax base are compensation, depreciation
and federal taxable income, as increased by net operating loss carry
forwards, if any, utilized in arriving at federal taxable income, and
decreased by the cost of acquisition of tangible assets during the year.
The tax rate through September 30, 1994 was 2.35% of the Michigan adjusted
tax base. Beginning October 1, 1994, the rate decreased to 2.30% of the
Michigan adjusted tax base.
DELAWARE TAXATION. As a Delaware holding company, SJS is
exempted from Delaware corporate income tax but is required to file an
annual report with and pay an annual fee to the State of Delaware. SJS is
also subject to an annual franchise tax imposed by the State of Delaware.
DESCRIPTION OF PROPERTIES
The Bank operates through its main office and three branches
located in St. Joseph, South Haven and Stevensville, Michigan. At
June 30, 1996, the Bank owned its main office and its three branch
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offices. As of June 30, 1996, the net book value of the Bank's
investment in premises, equipment and leaseholds was approximately
$1.2 million. SJS believes that it current facilities are adequate to
meet the present and foreseeable needs of the Bank and SJS.
LEGAL PROCEEDINGS
From time to time, the Bank is involved as plaintiff or
defendant in various legal actions arising in the normal course of
business. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after
consultation with counsel representing the Bank in the proceedings, that
the resolution of these proceedings should not have a material effect on
the Bank's results of operations.
The Bank's Stevensville branch office is situated on property
purchased by the Bank in 1986 from a large oil company. The property had
been the site of a gas station which had been inactive for several years.
Underground storage tanks were removed prior to the Bank's purchase of the
property. In May 1992, the Michigan Department of Natural Resources (the
"MDNR") notified the Bank that the property was the subject of an inquiry
by MDNR, which claims that the property may be a source of hydrocarbon
contamination of groundwater. In addition, in November 1992, another oil
company which owns and operates a service station located on property
adjacent to the Stevensville branch filed a lawsuit against the Bank in the
Michigan state courts seeking to recover a portion of the costs it had
expended to clean up hydrocarbon contamination on that company's property.
Management of the Bank believes that both claims are predicated upon the
presence of certain hydrocarbons in groundwater samples taken from a
monitoring well which the Bank voluntarily permitted a consultant working
for the oil company to drill on the Bank property in 1991. Based upon
additional tests performed by a consultant retained by the Bank, the
consultant concluded that it did not appear that the hydrocarbons recorded
at the site could be directly attributed to a release from the former
underground storage tanks on the Bank property and that the likely source
of the hydrocarbons was the release of gasoline at the oil company station
on the adjacent property in 1989. The Bank presented this evidence to the
MDNR which then requested that the Bank do further testing to determine
whether any underground storage tanks still existed on the site. This
testing was completed in July 1994. The environmental engineer who
conducted the testing reported that there did not appear to be any
underground storage tanks at the site, although the evidence collected by
the Bank is not clearly definitive. Based upon the advice of counsel
representing the Bank in these matters, the Bank has maintained that the
likelihood of liability being imposed upon the Bank for cleanup costs in
connection with these claims is remote. Accordingly, the Bank vigorously
contested the MDNR claim. On June 5, 1995, a new law took effect in
Michigan which substantially altered the basis upon which liability of
cleanup costs could be premised. Contrary to the former law, the new law
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provides, in essence, that for property owned prior to June of 1995,
liability may only be imposed when the owner or operator of the property is
responsible for an activity causing a release of contaminants.
On February 5, 1996, the Bank filed a Motion for Summary
Disposition in the Circuit Court for the County of Berrien, State of
Michigan, of the above-mentioned oil company's complaint and on
February 16, 1996 an Order Granting Motion for Summary Disposition was
entered. The Order dismissed the oil company's complaint with prejudice,
thereby allowing the oil company 14 days to amended its complaint. An
amended complaint was not filed nor has anything been filed in the Court
to date seeking an appeal. An appeal, however, may be filed at any time
prior to the conclusion of the case among all remaining parties, which
could be more than a year from the date of this filing. The Bank
considers the likelihood of liability remote, however, liability could be
imposed upon the Bank on these claims, in which case the Bank would be
responsible for a portion of the costs associated with a cleanup of the
groundwater contamination.
BENEFICIAL OWNERSHIP OF CERTAIN PERSONS
As of the Record Date, SJS had 917,622 shares of SJS Common
Stock issued and outstanding. The following table sets forth information
as of the Record Date regarding share ownership of those persons or
entities known by management to beneficially own more than 5 percent of
the SJS Common Stock.
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<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP<F1> OF CLASS
- ----------------------------------------------- ------------- --------
<S> <C> <C>
Peter T. Kross
248 Grosse Pointe Boulevard
Grosse Pointe Farms, Michigan 48236 97,084<F2> 10.58%
The Midwest Bank Fund II, L.P., Banc Fund III L.P.
and Bank Fund III Trust
208 S. LaSalle Street, Suite 200
Chicago, Illinois 60604 60,200<F3> 6.56%
________________________________
<FN>
<F1> The numbers of shares stated are based on information furnished by
each person listed and include shares personally owned of record by
that person and shares that are considered to be otherwise
beneficially owned by that person. A beneficial owner of a security
includes any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise has or shares
voting power or dispositive power with respect to the security.
Voting power includes the power to vote or direct the voting of the
security. Dispositive power includes the power to dispose or direct
the disposition of the security. A person will also be considered the
beneficial owner of a security if the person has a right to acquire
beneficial ownership of the security within 60 days. SJS and the
directors and officers of SJS and the Bank disclaim beneficial
ownership of shares held by the Bank in a fiduciary capacity. This
amount also includes options to purchase shares of SJS Common Stock
granted to directors and executive officers that are either currently
exercisable or exercisable within 60 days of the Record Date.
<F2> Based on information provided by Peter T. Kross, Richard J. Nelson,
Wallace D. Riley and Robert C. Lucas in an amended Schedule 13D (the
"Kross 13D group") dated August 2, 1996. SJS Common Stock reported as
beneficially owned by the Kross 13D group includes 75,400 shares,
14,500 shares, 6,042 shares and 1,142 shares with respect to which
Messrs. Kross, Nelson, Riley and Lucas, respectively, reported sole
voting and dispositive power. Messrs. Riley and Lucas are also
members of the Board of Directors of SJS.
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<PAGE>
<F3> Based on information provided by the Midwest Bank Fund II, L.P., Banc
Fund III L.P., and Bank Fund III Trust (the "Midwest 13D group") in a
Schedule 13D filed May 24, 1995. SJS Common Stock reported as
beneficially owned by the Midwest 13D group includes 18,700 shares,
10,209 shares, and 31,291 shares with respect to which Midwest Bank
Fund II, L.P., Banc Fund III L.P., and Bank Fund III Trust,
respectively, reported sole voting and dispositive power.
</FN>
</TABLE>
-74-
<PAGE>
The following table sets forth certain information regarding
SJS's Board of Directors, individually, and with executive officers as a
group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP<F4>
-------------------------------------------- PERCENT
STOCK STOCK OF
NAME OWNERSHIP OPTIONS<F5> TOTAL CLASS
- ------------------------------------ --------- ---------- ----- -------
<S> <C> <C> <C> <C>
James M. Behlen 1,162 381 1,543 <F*>
Neil R. Berndt 21,524 762 22,286 2.43%
William F. Early 12,159 952 13,111 1.43%
W. Ford Kieft III 1,262 381 1,643 <F*>
Robert C. Lucas<F6> 96,704 380 97,084 10.58%
James B. McQuillan 762 381 1,143 <F*>
Wallace D. Riley<F6> 96,704 380 97,084 10.58%
Edgar F. Ross 11,524 762 12,286 1.34%
Stephen E. Ross 3,524 762 4,286 <F*>
Larry D. Schultz 12,624 762 13,286 1.45%
Thomas G. Watson 8,691 2,857 11,548 1.25%
Directors and executive officers 208,559<F7> 15,903 224,462 14.46%
of SJS and the Bank, as a
group (16 persons)
_______________________________
<FN>
<F*> Less than 1 percent.
<F4> See footnote <F1> in the preceding table.
<F5> Represents options to purchase the number of shares of SJS Common
Stock granted under the 1996 Stock Option and Incentive Plan that are
either currently exercisable or exercisable within 60 days of the
Record Date.
<F6> See footnote <F2> in the preceding table.
<F7> The shares reported by Messrs. Lucas and Riley represent the same
shares; accordingly, such shares are only included once for purposes
of shares owned by directors and executive officers as a group. See
footnote <F2> in the preceding table.
</FN>
</TABLE>
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<PAGE>
GENERAL INFORMATION
INCORPORATION BY REFERENCE
This Proxy Statement incorporates documents by reference that are
not presented herein or delivered with it. All reports SJS files with the
Commission subsequent to the date of this Proxy Statement, but prior to the
date of the Special Meeting, pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act, are hereby incorporated by reference in this Proxy
Statement. A copy of such documents (other than certain exhibits thereto)
is available without charge to each person, including any beneficial owner,
to whom the Proxy Statement is delivered, upon written or oral request to:
SJS Bancorp, Inc., Irma R. Wedde, Secretary, SJS Bancorp, 301 State Street,
St. Joseph, Michigan 49085, (616) 983-0134. Documents requested will be
sent by first class mail or other equally prompt means within one business
day of receipt of the request. In order to ensure timely delivery of such
documents, any such request should be made by _________, 1997.
Any statement contained in a document incorporated or deemed to
be incorporated by reference in this Proxy Statement shall be deemed to be
modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained in this Proxy Statement or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference in this Proxy Statement modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements and schedules of SJS and
its subsidiaries incorporated by reference in this Proxy Statement to the
extent and for the periods indicated in their reports have been audited by
Crowe Chizek LLP, independent public accountants.
Representatives of Crowe Chizek LLP are expected to be present at
the Special Meeting. Such representatives will be given an opportunity to
make a statement if they so desire and are expected to be available to
respond to appropriate questions.
SOURCES OF INFORMATION
The information contained in this Proxy Statement relating to SJS
and Shoreline has been furnished by each of them for inclusion in this
Proxy Statement. SJS has relied upon Shoreline with respect to the
accuracy and completeness of the information concerning Shoreline, and
Shoreline has relied upon SJS with respect to the accuracy and completeness
of the information concerning SJS.
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<PAGE>
No person has been authorized to give any information or to make
any representations other than those contained in this Proxy Statement and,
if given or made, such information or representations must not be relied
upon as having been authorized by SJS. The delivery of this Proxy
Statement shall not under any circumstances create any implication that
there has been no change in the affairs of SJS since the date hereof or
that the information contained herein is correct as of any time subsequent
to its date.
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<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
SHORELINE FINANCIAL CORPORATION,
A MICHIGAN CORPORATION,
SJS ACQUISITION CORPORATION,
A MICHIGAN CORPORATION,
AND
SJS BANCORP, INC.,
A DELAWARE CORPORATION
November 6, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I - MERGER; CLOSING; EFFECTIVE TIME; DEFINITIONS . . . . . . . . .1
1.1 THE CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 EFFECTIVE TIME OF THE MERGER . . . . . . . . . . . . . . . . . .1
1.3 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.4 BANK CONSOLIDATION . . . . . . . . . . . . . . . . . . . . . . .2
1.5 COMPANY LIQUIDATION. . . . . . . . . . . . . . . . . . . . . . .2
1.6 REGULATORY AND STOCKHOLDER APPROVALS . . . . . . . . . . . . . .2
1.7 CERTIFICATE OF INCORPORATION; BYLAWS . . . . . . . . . . . . . .2
1.8 DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . .2
1.9 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE II - MERGER CONSIDERATION; CONVERSION OF SHARES IN THE MERGER. . .4
2.1 TERMS OF MERGER. . . . . . . . . . . . . . . . . . . . . . . . .4
2.2 PAYMENT FOR SHARES . . . . . . . . . . . . . . . . . . . . . . .5
2.3 PAYMENT FOR OPTIONS. . . . . . . . . . . . . . . . . . . . . . .6
2.4 DISSENTING SHARES. . . . . . . . . . . . . . . . . . . . . . . .6
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF COMPANY. . . . . . . . . .6
3.1 ORGANIZATION, STANDING, AND POWER. . . . . . . . . . . . . . . .6
3.2 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . .7
3.3 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.4 1996 FINANCIAL STATEMENTS; ABSENCE OF LIABILITIES. . . . . . . .8
3.5 AUTHORITY OF COMPANY . . . . . . . . . . . . . . . . . . . . . .8
3.6 NO VIOLATION . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.7 NO CONSENT . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.8 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.9 BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . .9
3.10 TITLE TO ASSETS . . . . . . . . . . . . . . . . . . . . . . . .9
3.11 CONDITION OF REAL PROPERTY. . . . . . . . . . . . . . . . . . 10
3.12 REAL AND PERSONAL PROPERTY LEASES . . . . . . . . . . . . . . 10
3.13 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.14 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.15 COMPLIANCE WITH LAWS AND REGULATIONS. . . . . . . . . . . . . 12
3.16 PERFORMANCE OF OBLIGATIONS. . . . . . . . . . . . . . . . . . 13
3.17 EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.18 BROKERS AND FINDERS . . . . . . . . . . . . . . . . . . . . . 13
3.19 MATERIAL CONTRACTS. . . . . . . . . . . . . . . . . . . . . . 13
3.20 ABSENCE OF CERTAIN CHANGES. . . . . . . . . . . . . . . . . . 14
3.21 LICENSES AND PERMITS. . . . . . . . . . . . . . . . . . . . . 15
3.22 REGULATORY ACTION . . . . . . . . . . . . . . . . . . . . . . 15
3.23 LOANS AND INVESTMENTS . . . . . . . . . . . . . . . . . . . . 16
3.24 LOAN ORIGINATION AND SERVICING. . . . . . . . . . . . . . . . 16
3.25 LOAN GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . 16
3.26 EMPLOYEE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . 16
3.27 COMPANY SEC REPORTS . . . . . . . . . . . . . . . . . . . . . 18
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<PAGE>
TABLE OF CONTENTS
-- CONTINUED --
PAGE
3.28 ENVIRONMENTAL CONDITIONS. . . . . . . . . . . . . . . . . . . 18
3.29 PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . 19
3.30 INSIDER INTERESTS . . . . . . . . . . . . . . . . . . . . . . 20
3.31 FAIRNESS OPINION. . . . . . . . . . . . . . . . . . . . . . . 20
3.32 DUTIES AS FIDUCIARY . . . . . . . . . . . . . . . . . . . . . 20
3.33 CHANGE IN BUSINESS RELATIONSHIPS. . . . . . . . . . . . . . . 20
3.34 PUBLIC COMMUNICATIONS; SECURITIES OFFERING. . . . . . . . . . 20
3.35 NO INSIDER TRADING. . . . . . . . . . . . . . . . . . . . . . 21
3.36 TRUE AND COMPLETE INFORMATION . . . . . . . . . . . . . . . . 21
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF ACQUIROR. . . . . . . . . 21
4.1 ORGANIZATION AND QUALIFICATION . . . . . . . . . . . . . . . . 21
4.2 AUTHORITY RELATIVE TO THIS AGREEMENT . . . . . . . . . . . . . 21
4.3 NO CONFLICT OR VIOLATION . . . . . . . . . . . . . . . . . . . 21
4.4 PROXY STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . 22
4.5 NECESSARY CAPITAL. . . . . . . . . . . . . . . . . . . . . . . 22
4.6 COMPLIANCE WITH APPLICABLE LAW . . . . . . . . . . . . . . . . 22
4.7 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.8 REGULATORY APPROVALS . . . . . . . . . . . . . . . . . . . . . 22
4.9 NO FACT OR CONDITION, ETC. . . . . . . . . . . . . . . . . . . 22
4.10 TRUE AND COMPLETE INFORMATION . . . . . . . . . . . . . . . . 23
ARTICLE V - ADDITIONAL COVENANTS AND AGREEMENTS. . . . . . . . . . . . . 23
5.1 ACCESS TO INFORMATION. . . . . . . . . . . . . . . . . . . . . 23
5.2 CONDUCT OF BUSINESS BY COMPANY . . . . . . . . . . . . . . . . 24
5.3 REGULATORY MATTERS . . . . . . . . . . . . . . . . . . . . . . 26
5.4 STOCKHOLDER APPROVAL . . . . . . . . . . . . . . . . . . . . . 27
5.5 UPDATED FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . 27
5.6 ACQUISITION PROPOSALS. . . . . . . . . . . . . . . . . . . . . 27
5.7 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . 27
5.8 EMPLOYMENT AGREEMENTS. . . . . . . . . . . . . . . . . . . . . 27
5.9 TREATMENT OF ESOP. . . . . . . . . . . . . . . . . . . . . . . 28
5.10 CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . . . . 28
5.11 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . 28
5.12 SUBSEQUENT DISCLOSURES. . . . . . . . . . . . . . . . . . . . 29
5.13 WARN ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.14 DISSENTING STOCKHOLDERS' APPRAISAL RIGHTS . . . . . . . . . . 29
5.15 DATA PROCESSING AND RELATED CONTRACTS . . . . . . . . . . . . 29
5.16 ENVIRONMENTAL INVESTIGATION . . . . . . . . . . . . . . . . . 29
5.17 TAX RULING. . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.18 EMPLOYEE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE VI - CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 30
6.1 CONDITIONS TO OBLIGATIONS OF ACQUIROR. . . . . . . . . . . . . 30
6.2 CONDITIONS TO OBLIGATIONS OF COMPANY . . . . . . . . . . . . . 32
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<PAGE>
TABLE OF CONTENTS
-- CONTINUED --
PAGE
ARTICLE VII - TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . 33
7.1 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.2 EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . . . . . 34
ARTICLE VIII - GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.1 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.2 WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.3 CHOICE OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . 36
8.4 SPECIFIC ENFORCEMENT . . . . . . . . . . . . . . . . . . . . . 36
8.5 JURISDICTION; VENUE; JURY. . . . . . . . . . . . . . . . . . . 36
8.6 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 36
8.7 HEADINGS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . 36
8.8 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.9 AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.10 NO ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . 37
8.11 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . 37
8.12 EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.13 PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.14 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.15 CALCULATION OF DATES AND DEADLINES. . . . . . . . . . . . . . 37
DEFINITIONS
1933 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1934 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1996 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . .4
Acquiring Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Acquiror . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Acquiror Disclosure Statement. . . . . . . . . . . . . . . . . . . . . . 21
Acquiror Trigger Event . . . . . . . . . . . . . . . . . . . . . . . . . 34
Acquiror Triggering Events . . . . . . . . . . . . . . . . . . . . . . . 35
Acquiror's Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Acquisition Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Affiliated Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Bank Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Bank Consolidation Agreement . . . . . . . . . . . . . . . . . . . . . . .2
Banking Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
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TABLE OF CONTENTS
-- CONTINUED --
PAGE
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Company Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Company Disclosure Statement . . . . . . . . . . . . . . . . . . . . . . .6
Company SEC Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Company Triggering Event . . . . . . . . . . . . . . . . . . . . . . . . 35
Company-Related Person . . . . . . . . . . . . . . . . . . . . . . . . . 20
Company's Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Company's Real Properties. . . . . . . . . . . . . . . . . . . . . . . . 10
Company's Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .3
DGCL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Dissenting Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Employee Benefit Plan. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Environmental Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ESOP Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Excess Parachute Payment . . . . . . . . . . . . . . . . . . . . . . . . 30
Exchange Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Federal Reserve Board. . . . . . . . . . . . . . . . . . . . . . . . . . .2
FHLB of Indianapolis . . . . . . . . . . . . . . . . . . . . . . . . . . .3
FHLMC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
FIB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Hazardous Substance. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
HOLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Immediate Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
IRS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Knowledge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MBCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MergerSub. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Non-Bank Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
OTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
PBGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Phase II and III Work. . . . . . . . . . . . . . . . . . . . . . . . . . 30
Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Proxy Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Recognition Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
SAIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
SEC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
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TABLE OF CONTENTS
-- CONTINUED --
PAGE
Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Subsequent Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
WARN Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
EXHIBITS
A - Company's Disclosure Statement. . . . . . . . . . . . . .A-1
B - Acquiror's Disclosure Statement . . . . . . . . . . . . .B-1
C - Form of Company's Counsel's Legal Opinion . . . . . . . .C-1
D - Form of Acquiror's Counsel's Legal Opinion. . . . . . . .D-1
E - Form of Definitive Employment Statement . . . . . . . . .E-1
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") is entered into on
November 6, 1996, by and among SHORELINE FINANCIAL CORPORATION, a Michigan
corporation ("ACQUIROR"), SJS ACQUISITION CORPORATION, a Michigan
corporation that is a wholly-owned subsidiary of Acquiror ("MERGERSUB"),
and SJS BANCORP, INC., a Delaware corporation ("COMPANY").
Acquiror and Company desire to have MergerSub merge with and into
Company upon the terms and subject to the conditions set forth in this
Agreement (the "MERGER"). Company will be the surviving corporate entity
in the Merger. The boards of directors of Acquiror, MergerSub, and Company
have each duly approved this Agreement. Upon consummation of the Merger,
Company will carry out its complete liquidation by merging with and into
Acquiror (then its parent corporation, with Acquiror being the surviving
corporation). Simultaneously, SJS Federal Savings Bank (the "BANK"), a
wholly-owned subsidiary of Company, will consolidate with Acquiror's Bank
("ACQUIROR'S BANK"), a wholly-owned subsidiary of Acquiror.
Capitalized terms appearing below have the meanings defined in this
Agreement. References to articles, sections, and exhibits refer to other
parts of this Agreement, unless otherwise indicated.
In consideration of the premises and the mutual covenants,
representations, warranties, and agreements contained in this Agreement,
Acquiror and Company agree as follows:
ARTICLE I - MERGER; CLOSING; EFFECTIVE TIME; DEFINITIONS
Subject to the terms and conditions of this Agreement, the Merger
shall be carried out in the following manner:
1.1 THE CLOSING. The Merger shall be consummated following the
"CLOSING." The Closing shall be held at such time, date, and location as
may be agreed by the parties. In the absence of such agreement, the
Closing shall be held at the offices of Warner Norcross & Judd LLP, 900 Old
Kent Building, 111 Lyon Street, N.W., Grand Rapids, Michigan, commencing at
11 a.m. on a date specified by either party upon 15 business days' notice
after the last to occur of the following events: (i) receipt of all
consents and approvals of government regulatory authorities legally
required to consummate the Merger and the expiration of all statutory
waiting periods; and (ii) adoption of this Agreement by Company's
stockholders. Scheduling or commencing the Closing shall not, however,
constitute a waiver of the conditions precedent of either Acquiror or
Company as set forth in Article VI. Upon completion of the Closing,
Company and MergerSub shall each execute and file the certificate of merger
as required by the Delaware General Corporation Law ("DGCL") and the
Michigan Business Corporation Act, as amended (the "MBCA"), to effect the
Merger (the "CERTIFICATE OF MERGER").
<PAGE>
1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall be consummated as
promptly as possible following the Closing by filing the Certificate of
Merger in the manner required by law. The "EFFECTIVE TIME" shall be as of
the time and date to be specified in the Certificate of Merger, which shall
be as soon as practicable following the Closing.
1.3 THE MERGER. Subject to the terms and conditions of this
Agreement, including the receipt of all requisite regulatory and
stockholder approvals, Company and MergerSub shall consummate the Merger in
which MergerSub shall be merged with and into Company and the separate
corporate existence of MergerSub shall then cease. Company shall be the
surviving corporation in the Merger and shall become a wholly-owned
subsidiary of Acquiror. Company shall continue to be governed by the laws
of the State of Delaware with all its rights, privileges, powers, and
franchises unaffected by the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL and the MBCA in cases where the surviving
corporation will be a Delaware corporation.
1.4 BANK CONSOLIDATION. After the Effective Time, Acquiror intends
to consolidate Bank and Acquiror's Bank into a single Michigan banking
corporation where Acquiror's Bank will be the consolidated bank resulting
from the transaction (the "BANK CONSOLIDATION"). The Bank Consolidation
will be effected pursuant to a consolidation agreement (the "BANK
CONSOLIDATION AGREEMENT"), in the form required by the Michigan Banking
Code of 1969, as amended (the "BANKING CODE"), and by the HOLA, containing
terms and conditions, not inconsistent with this Agreement, as determined
by Acquiror's Bank. The Bank Consolidation shall only occur if the Merger
is consummated, and it shall become effective immediately after the
Effective Time or such later time as may be determined by Acquiror. In
order to obtain the necessary regulatory approval for the Bank
Consolidation to occur immediately after the Effective Time, Acquiror may
request that Bank and Acquiror's Bank each execute and deliver the Bank
Consolidation Agreement prior to the Effective Time. Regardless of when
executed and delivered, the effectiveness of the Bank Consolidation
Agreement shall be subject to Acquiror's action, in its capacity as the
sole shareholder of Acquiror's Bank and of Bank, to approve the Bank
Consolidation Agreement immediately after the Effective Time.
1.5 COMPANY LIQUIDATION. Immediately following the Bank
Consolidation, Acquiror shall contribute all of its common stock in Company
(then a subsidiary of Acquiror) to the consolidated bank and Company shall
adopt a plan of complete liquidation transferring all of its assets and
liabilities to the consolidated bank and the separate corporate existence
of Company shall then immediately cease.
1.6 REGULATORY AND STOCKHOLDER APPROVALS. Company will cooperate in
the preparation by Acquiror and Acquiror's Bank of the applications to the
Board of Governors of the Federal Reserve System ("FEDERAL RESERVE BOARD"),
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the FDIC, the OTS, the Financial Institutions Bureau ("FIB"), and any other
regulatory authorities as may be necessary in connection with all
governmental approvals requisite to the consummation of the transactions
contemplated by this Agreement. Acquiror and Company will each cooperate
in the preparation of the applications, statements, or materials as may be
required to be furnished to the stockholders of Company or filed or
submitted to appropriate governmental agencies in connection with the
Merger.
1.7 CERTIFICATE OF INCORPORATION; BYLAWS. At the Effective Time, the
Certificate of Incorporation and Bylaws of Company shall become the
Certificate of Incorporation and Bylaws, respectively, of the surviving
corporation.
1.8 DIRECTORS AND OFFICERS. The directors and officers of MergerSub
at the Effective Time shall, from and after the Effective Time, be the
directors and officers, respectively, of the surviving corporation until
their successors have been duly elected or appointed in accordance with the
Bylaws of the surviving corporation.
1.9 DEFINITIONS. In addition to capitalized terms otherwise defined
in this Agreement, the following capitalized terms shall have the meanings
specified below:
(a) "AFFILIATE" of, or a person "AFFILIATED" with, a specific
person is a person that directly or indirectly, through one or more
intermediaries (by virtue of legal or beneficial ownership,
contractual rights, or otherwise) controls, or is controlled by, or is
under common control with, the person specified;
(b) "CERTIFICATE" means a stock certificate evidencing ownership
of shares of Company Common Stock;
(c) "CLOSING" means the satisfaction, performance, or waiver by
the parties of all of the conditions set forth in Article VI, which
shall take place as provided in Section 1.1 (THE CLOSING);
(d) "CODE" means the Internal Revenue Code of 1986, as amended;
(e) "COMPANY COMMON STOCK" means the common stock, par value
$0.01 per share, of Company;
(f) "COMPANY'S SUBSIDIARIES" means Bank, Non-Bank Subsidiary,
and any other person in which Company holds a direct or indirect
equity interest of fifty-one percent (51%) or more;
(g) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended;
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<PAGE>
(h) "ESOP" means the SJS Bancorp, Inc., Employee Stock Ownership
Plan, as amended;
(i) "EXCHANGE AGENT" means Acquiror's Bank, as agent for the
purpose of effectuating the exchange of Certificates for the Merger
Consideration in accordance with Article II;
(j) "FDIC" means the Federal Deposit Insurance Corporation;
(k) "FHLB OF INDIANAPOLIS" means the Federal Home Loan Bank of
Indianapolis;
(l) "FHLMC" means the Federal Home Loan Mortgage Corporation;
(m) "HOLA" means the federal Home Owners' Loan Act, as amended;
(n) "IMMEDIATE FAMILY" means a person's spouse, parents, in-laws,
children, and siblings;
(o) "INCENTIVE PLAN" means the SJS Bancorp, Inc., 1996 Stock
Option and Incentive Plan;
(p) "IRS" means the Internal Revenue Service;
(q) "KNOWLEDGE" or "TO THE KNOWLEDGE OF" means to the actual
knowledge of any senior executive officer of the party or the party's
subsidiaries and of any current non-employee director of the party or
the party's subsidiaries;
(r) "MERGER CONSIDERATION" means the right to receive cash, in
the amount of $27 per share, into which shares of Company Common Stock
shall be converted pursuant to this Agreement upon the effectiveness
of the Merger; if for any reason, between the date of this Agreement
and the Effective Time, the number of shares of Company Common Stock
outstanding or the number of unexercised Stock Options outstanding
shall have been changed for any reason (whether or not a breach of
this Agreement), then the amount of cash into which shares of Company
Common Stock are to be converted shall be adjusted by multiplying $27
by a fraction, the numerator of which is (x) 917,622 plus (y) the
number of Stock Options, and the denominator of which is (xx) the
number of shares of Company Common Stock outstanding at the Effective
Time plus (yy) the number of Stock Options, any other options, and any
other rights to acquire Company Common Stock outstanding at the
Effective Time.
(s) "NON-BANK SUBSIDIARY" means SJS Financial Corporation, a
Michigan corporation;
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<PAGE>
(t) "OTS" means the Office of Thrift Supervision, an Office of
the United States Department of the Treasury;
(u) "PBGC" means the Pension Benefit Guaranty Corporation;
(v) "PERSON" (whether or not capitalized) means any individual,
corporation, association, partnership, limited liability company,
limited partnership, trust, joint venture, other legal entity,
government or governmental department or agency;
(w) "PROXY STATEMENT" means the proxy statement, including all
amendments, supplements, and related materials to be used by Company
in connection with the solicitation by its board of directors of
proxies for use at the Stockholders' Meeting;
(x) "RECOGNITION PLAN" means the SJS Bancorp, Inc., Management
Recognition Plan;
(y) "SAIF" means the Savings Association Insurance Fund
administered by the FDIC;
(z) "SEC" means the Securities and Exchange Commission;
(aa) "STOCKHOLDERS' MEETING" means the meeting of Company's
stockholders, including all adjournments, properly called, noticed,
and held for the purpose of considering adoption of this Agreement and
approval of the Merger as required by the DGCL and Company's
Certificate of Incorporation;
(bb) "TRANSACTION DOCUMENT" collectively means the Proxy
Statement and any other documents to be filed with the SEC, the
Federal Reserve Board, the FDIC, the FIB, the State of Delaware, the
State of Michigan, or any other governmental or regulatory agency in
connection with the transactions contemplated by this Agreement.
(cc) "1933 ACT" means the Securities Act of 1933, as amended;
(dd) "1934 ACT" means the Securities Exchange Act of 1934, as
amended; and
(ee) "1996 FINANCIAL STATEMENTS" means the audited consolidated
financial statements of Company contained, or incorporated by
reference, in Company's Annual Report on Form 10-KSB for the year
ended June 30, 1996, as filed with the SEC.
ARTICLE II - MERGER CONSIDERATION; CONVERSION OF SHARES IN THE MERGER
2.1 TERMS OF MERGER. Upon the Merger becoming effective:
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<PAGE>
(a) COMPANY COMMON STOCK SHARES. At the Effective Time, each
share of Company Common Stock issued and outstanding immediately prior
to the Effective Time, other than Company Common Stock representing
Dissenting Shares, and other than Company Common Stock owned by
Acquiror and as provided in Subsection 2.1(b) (TREASURY SHARES) shall,
IPSO FACTO and without any action on the part of any stockholder,
become and be converted into the right to receive the Merger
Consideration. Certificates representing outstanding Company Common
Stock, other than those representing Dissenting Shares, shall, after
the Effective Time, represent only the right to receive the Merger
Consideration from Acquiror. Upon surrender to the Exchange Agent, in
proper form for cancellation, of Certificates held of record by a
holder of Company Common Stock, that holder shall be entitled to
receive a check from the Exchange Agent in an appropriate amount of
Merger Consideration for those shares. Until so presented and
surrendered in exchange for the Merger Consideration, each Certificate
which represented issued and outstanding Company Common Stock shall be
deemed for all purposes to evidence only the right to receive the
Merger Consideration. After the Effective Time, there shall be no
transfer on the stock transfer books of Company of Company Common
Stock. No interest shall accrue or be payable with respect to the
Merger Consideration.
(b) TREASURY SHARES. Each share of Company Common Stock issued
and held by Company in its treasury or owned of record by Acquiror or
any subsidiary of Acquiror on the Effective Time shall be canceled and
retired and no securities shall be issuable and no cash paid with
respect to those shares.
(c) CONVERSION OF STOCK OPTIONS. Each option granted under the
Incentive Plan issued and outstanding immediately prior to the
Effective Time shall IPSO FACTO and without any action on the part of
any option holder, become and be converted into the right to receive
the difference between the Merger Consideration and the applicable
option exercise price; provided that Company shall, at Acquiror's
request, use its best efforts to enter into option termination
agreements with the holders of the options pursuant to which Company
may agree to pay to the holders the cash amount immediately prior to
the Merger upon surrender and cancellation of their outstanding
options.
(d) CONVERSION OF MERGERSUB SHARES. Each share of common stock
of MergerSub issued and outstanding on the Effective Time shall, IPSO
FACTO and without any action on the part of Acquiror, continue as one
share of the common stock of the surviving corporation. Outstanding
certificates representing shares of common stock of MergerSub shall be
deemed to represent an identical number of shares of common stock of
the surviving corporation.
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<PAGE>
2.2 PAYMENT FOR SHARES. Company's stockholders shall exchange their
Certificates for the Merger Consideration in the following manner:
(a) FUNDS AVAILABILITY. From time to time after the Effective
Time, Acquiror shall make available or cause to be made available to
the Exchange Agent amounts sufficient in the aggregate to provide all
funds necessary for the Exchange Agent to make payments of the Merger
Consideration to holders of Company Common Stock issued and
outstanding immediately prior to the Effective Time.
(b) TRANSMITTAL INSTRUCTIONS. Promptly after the Effective
Time, Acquiror shall cause to be mailed to each person who was, at the
Effective Time, a holder of record of issued and outstanding Company
Common Stock a form (agreed to by Acquiror and Company) of letter of
transmittal and instructions for use in effecting the surrender of the
Certificates which, immediately prior to the Effective Time,
represented the shares. Acquiror shall make these documents available
for hand delivery at Bank and Acquiror's Bank.
(c) SURRENDER OF CERTIFICATES. Upon surrender to the Exchange
Agent of the Certificates (or affidavits of lost Certificates and
indemnity bonds in such form as is acceptable to the Exchange Agent
with respect to lost Certificates), together with the letter of
transmittal, duly executed and completed in accordance with the
related instructions, the Exchange Agent shall promptly cause to be
paid to the persons entitled thereto a check in the amount to which
the persons are entitled, after giving effect to any required tax
withholdings.
(d) UNCERTIFICATED ESOP SHARES. Payment of the Merger
Consideration with respect to uncertificated shares of Company Common
Stock (or fractional shares) held by the trustee of the ESOP shall be
made to the trustee upon delivery to the Exchange Agent of
documentation acceptable to Exchange Agent.
(e) STOCK TRANSFERS. If payment is to be made to a person other
than the registered holder of the Certificate surrendered, it shall be
a condition of the payment that the Certificate so surrendered shall
be properly endorsed or accompanied by an executed stock power, with a
satisfactory signature guarantee, and shall be in proper form for
transfer. A record holder requesting payment of the Merger
Consideration to another person shall pay any transfer or other taxes
required by reason of the requested transfer or establish to the
satisfaction of Acquiror or the Exchange Agent that the tax has been
paid or is not applicable.
(f) UNCLAIMED CASH. One hundred eighty (180) days following the
Effective Time, Acquiror shall be entitled to cause the Exchange Agent
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<PAGE>
to deliver to it any funds (including any interest received with
respect thereto) made available to the Exchange Agent which have not
been disbursed to holders of Certificates formerly representing
Company Common Stock outstanding at the Effective Time. Thereafter
the holders shall be entitled to look to Acquiror only as general
creditors with respect to the cash payable upon due surrender of their
Certificates. The Exchange Agent shall also deliver to Acquiror a
certified list of the names and addresses of all former registered
holders of Company Common Stock who have not then surrendered their
Certificates to receive the Merger Consideration to which they are
entitled. Notwithstanding the foregoing, neither the Exchange Agent
nor any party hereto shall be liable to any holder of Certificates
formerly representing the shares for any amount paid to a public
official pursuant to any applicable abandoned property, escheat, or
similar law.
(g) EXCHANGE AGENT EXPENSES. Acquiror shall pay all charges and
expenses, including those of the Exchange Agent, in connection with
the payment of the Merger Consideration in exchange for Company Common
Stock.
2.3 PAYMENT FOR OPTIONS. If Company has not previously entered into
agreements with all holders of options under the Incentive Plan and caused
the surrender of the options prior to the Effective Time, within five (5)
days after the Effective Time, Acquiror shall notify the remaining holders
of options under the Incentive Plan of the procedure for receipt of
payments for their unexercised options, which payments shall be made by
Acquiror within ten (10) days after an option holder has surrendered all of
his options to Acquiror. Acquiror shall also make available to Company
sufficient funds to enable Company to consummate the termination of
unexercised stock options, as contemplated by Subsection 2.1(c) (CONVERSION
OF STOCK OPTIONS).
2.4 DISSENTING SHARES. Any shares of Company Common Stock held by a
holder who shall not have voted the shares in favor of the Merger and who
shall have complied with the applicable procedures of Section 262 of the
DGCL (if applicable) and becomes entitled to obtain payment for the
appraised value of the shares pursuant to Section 262 of the DGCL (if
applicable) shall be in this Agreement called "DISSENTING SHARES."
Notwithstanding any other provision of this Agreement, any Dissenting
Shares shall not, after the Effective Time, be entitled to vote for any
purpose or receive any dividends or other distributions and shall be
entitled only to the rights as are afforded in respect of Dissenting Shares
pursuant to the DGCL. All payments in respect of Dissenting Shares shall
be from funds of Acquiror and not from the acquired assets of Company.
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<PAGE>
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Acquiror that, except as otherwise
set forth in the disclosure statement dated November 6, 1996, constituting
Exhibit A (collectively, the "COMPANY DISCLOSURE STATEMENT"), which has
been delivered to Acquiror prior to the execution of this Agreement:
3.1 ORGANIZATION, STANDING, AND POWER.
(a) COMPANY'S ORGANIZATION. Company is duly organized, validly
existing, and in good standing as a corporation under the laws of the
State of Delaware and is authorized by the OTS to be a savings and
loan holding company. Company has all requisite corporate power and
authority to own, lease, and operate its properties and assets and to
carry on its business as presently conducted. Neither the scope of
the business of Company nor the location of any of its properties
requires that it be licensed to do business in any jurisdiction other
than the State of Michigan. True and correct copies of Company's
Certificate of Incorporation and Bylaws, including all amendments to
the date of this Agreement, are contained in the Company Disclosure
Statement.
(b) BANK'S ORGANIZATION. Bank is duly organized and validly
existing as a federally chartered stock savings bank under HOLA and is
authorized by the OTS to conduct a savings and loan business. Bank is
a member of the FHLB of Indianapolis, and its deposits are insured by
the SAIF in the manner and to the extent provided by law. Bank has
paid when due all deposit insurance assessments by the FDIC. Bank has
all requisite corporate power and authority to own, lease, and operate
its properties and assets and to carry on its business as presently
conducted. Neither the scope of the business of Bank nor the location
of any of its properties requires that it be licensed to do business
in any jurisdiction other than the State of Michigan. True and
correct copies of Bank's Charter and Bylaws, including all amendments
to the date of this Agreement, are contained in the Company Disclosure
Statement.
(c) NON-BANK SUBSIDIARY'S ORGANIZATION. Non-Bank Subsidiary is
duly organized, validly existing, and in good standing as a
corporation under the laws of the State of Michigan and is duly
qualified or licensed as a foreign corporation in each other state or
jurisdiction in which the ownership of property or the conduct of
business requires licensing or qualification, except where the failure
to be so qualified or licensed would not have a material adverse
effect on the financial condition, net income, business, or operations
of Company and Company's Subsidiaries, taken as a whole. Non-Bank
Subsidiary has all requisite corporate power and authority to own,
lease, and operate its respective properties and assets and to carry
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<PAGE>
on its business as presently conducted. Non-Bank Subsidiary is
engaged only in those activities which are permitted by the OTS. True
and correct copies of the Articles of Incorporation and Bylaws of Non-
Bank Subsidiary, including all amendments to the date of this
Agreement, are contained in the Company Disclosure Statement.
(d) OTHER ENTITIES. The Company Disclosure Statement contains a
list of all legal entities that during the past three (3) years were
formerly Affiliates of Company, together with a description of the
disposition of the Affiliate.
3.2 CAPITALIZATION.
(a) COMPANY'S CAPITAL STOCK. The authorized capital stock of
Company consists of 4,500,000 shares of Company Common Stock, par
value $0.01 per share, of which 917,622 shares are issued and
outstanding as of the date of this Agreement, and 2,000,000 shares of
preferred stock, par value $0.01 per share, none of which is
outstanding. All of the outstanding shares of Company Common Stock
are validly issued, fully paid, and nonassessable. Except for stock
options covering not more than 79,509 shares of Common Stock granted
pursuant to the Incentive Plan (the "STOCK OPTIONS"), there are no
outstanding options, warrants, or other rights in or with respect to
the unissued shares of Company's capital stock nor any securities
convertible into the stock. Except as described in this Section,
Company is not obligated to issue any additional shares of Company's
capital stock or any additional options, warrants, or other rights in
or with respect to the unissued shares of Company's capital stock or
any other securities convertible into Company's capital stock.
(b) ISSUANCE OF SHARES. After the execution of this Agreement,
the number of issued and outstanding shares of Company Common Stock is
not subject to change before the Effective Time except for the
exercise of the Stock Options.
(c) VOTING RIGHTS. Other than the shares of Company Common
Stock, neither Company nor any of Company's Subsidiaries have
outstanding any security or issue of securities:
(i) The holder or holders of which have the right to vote
on the adoption of this Agreement or approval of the Merger; or
(ii) Which entitle the holder or holders to consent to, or
withhold consent on, the Merger or this Agreement.
(d) BANK CAPITAL STOCK. The authorized capital stock of Bank
consists of 4,500,000 shares of common stock, $0.01 par value each, of
which 917,622 shares are issued and outstanding, and 2,000,000 shares
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of serial preferred stock, none of which is outstanding. All of the
outstanding shares of Bank's common stock are validly issued, fully
paid, and nonassessable and are owned by Company, free and clear of
all liens and encumbrances. There are no outstanding options,
warrants, or other rights in or with respect to the unissued shares of
Bank's common stock nor any securities convertible into the stock and
Bank is not obligated to issue any additional shares of its common
stock or any additional options, warrants, or other rights in or with
respect to the unissued shares of Bank's common stock or any other
securities convertible into Bank's common stock.
(e) NON-BANK SUBSIDIARY CAPITAL STOCK. All of the outstanding
shares of common stock of Non-Bank Subsidiary are validly issued,
fully paid, and nonassessable and are owned by Bank, free and clear of
all liens and encumbrances. There are no outstanding options,
warrants, or other rights in or with respect to the unissued shares of
Non-Bank Subsidiary's common stock nor any securities convertible into
that stock. Non-Bank Subsidiary is not obligated to issue any
additional shares of its common stock or any additional options,
warrants, or other rights in or with respect to the unissued shares of
its common stock or any other securities convertible into Non-Bank
Subsidiary's common stock.
3.3 SUBSIDIARIES. Except for Bank and Non-Bank Subsidiary, and
except for stock held in the FHLB of Indianapolis and MIMLIC Life Insurance
Company, and equity interests obtained upon the exercise of creditors
rights in the usual course of its business or held as collateral against
extensions of credit or held in escrow for safekeeping, neither Company nor
any of Company's Subsidiaries owns or holds, directly or indirectly, more
than a five percent (5%) equity interest in any person.
3.4 1996 FINANCIAL STATEMENTS; ABSENCE OF LIABILITIES.
(a) FINANCIAL STATEMENTS. The Company Disclosure Statement
contains copies of the 1996 Financial Statements of Company. The 1996
Financial Statements of Company: (i) fairly present the consolidated
financial condition of Company and Company's Subsidiaries as of the
respective dates indicated and its consolidated results of operations
and the consolidated changes in its stockholders' equity and cash
flows for the respective periods indicated; (ii) have been prepared in
accordance with generally accepted accounting principles consistently
applied for the periods indicated, except as otherwise noted; (iii)
are based on the books and records of Company; and (iv) contain and
reflect reserves for all material accrued liabilities as of the date
of the statements and for all reasonably anticipated losses as of the
date of the statements, including (but not limited to) adequate
reserves for reasonably anticipated loan losses and losses upon
disposition or sale of other real estate owned by Bank.
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(b) NO UNDISCLOSED LIABILITIES. Company does not know of any
liabilities or obligations, either accrued or contingent, which are
material to it and which have not been reflected or disclosed in the
1996 Financial Statements of Company other than liabilities and
obligations incurred subsequent to June 30, 1996, in the ordinary
course of business. Company does not know of any basis for the
assertion against it of any liability, obligation, or claim
(including, without limitation, that of any regulatory authority) that
might result in or cause a material adverse change in the financial
condition of Company which is not fairly reflected in the 1996
Financial Statements or in Company SEC Reports (including the
accompanying financial statements thereto) filed with the SEC
subsequent to the filing of Company's most recent Annual Report on
Form 10-KSB.
3.5 AUTHORITY OF COMPANY. Subject to the requisite adoption of this
Agreement by the stockholders of Company, the execution, delivery, and
performance by Company of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly and validly
authorized by all necessary corporate action on the part of Company. This
Agreement is a valid and binding obligation of Company, enforceable in
accordance with its terms, except insofar as the enforceability may be
limited by applicable bankruptcy, insolvency, receivership, and other laws
affecting the rights of creditors generally.
3.6 NO VIOLATION. Neither the execution, delivery, and performance
by Company of this Agreement, the consummation of the transactions
contemplated in this Agreement, nor compliance by Company with any of the
provisions of this Agreement, will:
(a) CORPORATE DOCUMENTS. Conflict with or result in a breach of
any provision of its Certificate of Incorporation or Bylaws;
(b) MATERIAL CONTRACTS. Constitute a breach of or result in a
default, or give rise to any rights of termination, cancellation, or
acceleration, or any right to acquire any securities (other than the
options currently outstanding under the Incentive Plan and shares of
Company Common Stock currently outstanding but subject to restrictions
under the Recognition Plan) or assets, under any of the terms,
conditions, or provisions of any note, bond, mortgage, indenture,
franchise, license, permit, agreement, or other instrument or
obligation to which Company or Company's Subsidiaries are a party, or
by which Company or Company's Subsidiaries or any of their respective
properties or assets are bound, if in any of those circumstances the
event could have consequences materially adverse to the financial
condition, net income, business, or operations of Company and
Company's Subsidiaries, taken as a whole, or impair Company's ability
to perform its obligations under this Agreement; or
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(c) ORDERS AND INJUNCTIONS. Violate any order, writ,
injunction, decree, statute, rule, or regulation applicable to Company
or Company's Subsidiaries or any of their respective properties or
assets, subject to receipt of the approvals described in Section 3.7
(NO CONSENT).
3.7 NO CONSENT. No consent of, approval of, notice to, or filing
with any governmental authority having jurisdiction over any aspect of the
business or assets of Company or Company's Subsidiaries, and no consent of,
approval of, or notice to or filing with any other person is required in
connection with the execution, delivery, and performance by Company of this
Agreement or the consummation by Company of the transactions contemplated
by this Agreement, except:
(a) STOCKHOLDER ADOPTION. The adoption of this Agreement and
the transactions contemplated by this Agreement by the stockholders of
Company;
(b) REGULATORY APPROVALS. The approvals of the Federal Reserve
Board, the FDIC, the OTS, the FIB, and any other governmental
authorities having jurisdiction that are required by law or regulation
to consummate the transactions contemplated by this Agreement.
3.8 INSURANCE. Company and the Company's Subsidiaries have in full
force and effect policies of insurance (including, without limitation, a
blanket bond, fire, third-party liability, use and occupancy) with respect
to their assets and business against the casualties and contingencies and
in the amounts, types, and forms as are, in the reasonable opinion of
management of Company, appropriate for their business, operations,
properties, and assets. The Company Disclosure Statement contains a list
of all policies of insurance carried and owned by Company and Company's
Subsidiaries, showing the name of the insurance company, the nature of the
coverage, the policy limit, the annual premiums, and the expiration dates.
The Company Disclosure Statement contains a complete copy of each policy of
insurance.
3.9 BOOKS AND RECORDS. The minutes contained in corporate minute
books and files of Company and each of Company's Subsidiaries (including
former wholly owned Subsidiaries for all purposes of this Section) properly
and accurately record in all material respects all actions actually taken
by its shareholders, directors, and committees of directors. The books,
accounts, and financial records of Company and each of Company's
Subsidiaries reflect only actual transactions and have been maintained in
all material respects in the usual and regular manner in accordance with
good accounting practices and in compliance with all applicable laws and
regulations.
3.10 TITLE TO ASSETS. Company and Company's Subsidiaries have good,
sufficient, and marketable title to all of their properties and assets,
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whether real, personal, or a combination thereof, reflected in their books
and records as being owned (including those reflected in the consolidated
balance sheet of Company and Company's Subsidiaries as of June 30, 1996,
except as since disposed of in the ordinary course of business), free and
clear of all liens and encumbrances, except:
(a) REFLECTED ON BALANCE SHEET. As reflected on the
consolidated balance sheet of Company and Company's Subsidiaries as of
June 30, 1996, or the notes thereto;
(b) NORMAL TO BUSINESS. Liens for current taxes not yet
delinquent, and liens or encumbrances which are normal to the business
of Company and Company's Subsidiaries and which are not material in
relation to the financial condition, net income, business, or
operations of Company or any of Company's Subsidiaries; and
(c) IMMATERIAL IMPERFECTIONS. Such imperfections of title,
easements, and encumbrances, if any, as are not material in character,
amount, or extent, and do not materially detract from the value, or
materially interfere with the present use, of the properties subject
thereto or affected thereby, or which would not otherwise be material
to the financial condition, net income, business, or operations of
Company or any of Company's Subsidiaries.
3.11 CONDITION OF REAL PROPERTY. With respect to each parcel of real
property owned by Company and Company's Subsidiaries ("COMPANY'S REAL
PROPERTIES"), to Company's knowledge:
(a) NO ENCROACHMENTS. No building or improvement to Company's
Real Properties encroaches on any easement or property owned by
another person. No building or property owned by another person
encroaches on Company's Real Properties or on any easement benefiting
Company's Real Properties. None of the boundaries of Company's Real
Properties deviates substantially from those shown on the survey of
such property, if any, included with the Company Disclosure Statement
or from what the boundaries appear to be through visual inspection.
No claim of encroachment has been asserted by any person with respect
to Company's Real Properties.
(b) ZONING. Neither Company nor any of Company's Subsidiaries
are in material violation of any zoning regulation, building
restriction, restrictive covenant, ordinance, or other law, order,
regulation, or requirement relating to Company's Real Properties.
(c) BUILDINGS. All buildings and improvements to Company's Real
Properties are in good condition (normal wear and tear excepted), are
structurally sound and are not in need of material repairs, are fit
for their intended purposes, and are adequately serviced by all
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utilities necessary for the effective operation of business as
presently conducted at that location.
(d) NO CONDEMNATION. None of Company's Real Properties are the
subject of any condemnation action. There is, to the best of
Company's knowledge, no proposal under active consideration by any
public or governmental authority or entity to acquire Company's Real
Properties for any governmental purpose.
3.12 REAL AND PERSONAL PROPERTY LEASES. With respect to the leases
and licenses pursuant to which Company or any of Company's Subsidiaries, as
lessee or licensee, have possession of real or personal property
("COMPANY'S LEASES"):
(a) BINDING AND VALID. To Company's knowledge, each of
Company's Leases are valid, effective, and enforceable against the
lessor or licensor in accordance with its terms.
(b) NO DEFAULT. There is no existing default under any of
Company's Leases or any event which with notice or lapse of time, or
both, would constitute a default with respect to Company, any of
Company's Subsidiaries, or any other party to the contract, which
default would have a material adverse effect on the financial
condition, net income, business, or operations of Company and
Company's Subsidiaries, taken as a whole.
(c) ASSIGNMENT. None of Company's Leases contain a prohibition
against assignment by Company or any of Company's Subsidiaries, by
operation of law or otherwise, or any provision which would materially
interfere with the possession or use of the property by Acquiror or
its subsidiaries for the same purposes and upon the same rental and
other terms following consummation of the Merger as are applicable to
Company or Company's Subsidiaries, excepting from this representation
any Company Lease which is not material to the financial condition,
net income, business, or operations of Company and Company's
Subsidiaries, taken as a whole.
3.13 LITIGATION. There is no private or governmental suit, claim,
action, or proceeding (arbitral or otherwise) pending or, to the knowledge
of Company, threatened against Company, any of Company's Subsidiaries, or
any person who may be entitled to indemnification by Company or Company's
Subsidiaries involving a monetary claim in excess of $10,000 or a demand
for equitable relief, or against any of their directors or officers
relating to the performance of their duties in those capacities. There are
no material judgments, decrees, stipulations, or orders against Company or
Company's Subsidiaries enjoining them or any of their directors or officers
in respect of, or the effect of which is to prohibit, any business practice
or the acquisition of any property or the conduct of business in any area.
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The Company Disclosure Statement contains summary reports of its attorneys,
dated on or after June 30, 1996, on all pending litigation to which
Company, Bank, or any of their directors or officers are a party and which
names Company, any of Company's Subsidiaries, or any person who may be
entitled to indemnification by Company or Company's Subsidiaries as a
defendant or cross-defendant and prays for damages or any other remedy or
remedies that, if sustained, could have consequences materially adverse to
the financial condition, net income, business, or operations of Company and
Company's Subsidiaries, taken as a whole, or impair the ability of Company
to perform its obligations under this Agreement or the ability of Bank to
perform its obligations under the Bank Consolidation Agreement. During the
last ten (10) years, neither Company nor any of Company's Subsidiaries have
been named in any class action lawsuit, regardless of its outcome, or in
any lawsuit or formal administrative proceeding alleging a material
violation of any banking or thrift laws or regulations.
3.14 TAXES.
(a) TAX RETURNS. Company and Company's Subsidiaries have each
filed all federal and foreign income tax returns, all state and local
franchise and income tax, real and personal property tax, sales and
use tax, premium tax, excise tax, and other tax returns of every
character required to be filed by it and have paid all taxes, together
with any interest and penalties owing in connection therewith, shown
on the returns to be due in respect of the periods covered by the
returns, other than taxes which are being contested in good faith and
for which adequate reserves have been established.
(b) PAYROLL TAXES. Company and Company's Subsidiaries have each
filed all required payroll tax returns, have fulfilled all tax
withholding obligations, and have paid over to the appropriate
governmental authorities the proper amounts with respect to the
foregoing.
(c) TAX POSITIONS. The tax and audit positions taken by Company
and Company's Subsidiaries in connection with the tax returns
described in this Section 3.14 were reasonable and asserted in good
faith.
(d) TAX PROVISIONS. To Company's knowledge, adequate provision
has been made in the books and records of Company and Company's
Subsidiaries and, to the extent required by generally accepted
accounting procedures, reflected in the 1996 Financial Statements of
Company, for all tax liabilities, including interest or penalties,
whether or not due and payable and whether or not disputed, with
respect to any and all federal, foreign, state, local, and other taxes
for the periods covered by the 1996 Financial Statements and for all
prior periods.
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(e) CLOSED YEARS. The IRS has examined, or the statute of
limitations has expired with respect to, the federal tax returns of
Company and the Company's Subsidiaries (to the extent not filed as
part of a consolidated return of Company) for all periods ending prior
to and including June 30, 1989.
(f) EXTENSIONS; DEFICIENCIES. The Company Disclosure
Statement sets forth (a) the date or dates through which any foreign,
state, local, or other taxing authority has examined any other tax
returns of Company and Company's Subsidiaries; (b) a complete list of
each year for which any federal, state, local, or foreign tax
authority has obtained or has requested an extension of the statute of
limitations from Company and Company's Subsidiaries and lists each tax
case involving Company or Company's Subsidiaries currently pending in
audit, at the administrative appeals level, or in litigation; and (c)
the date and issuing authority of each statutory notice of deficiency,
notice of proposed assessment, and revenue agent's report issued to
Company and Company's Subsidiaries within the last twelve (12) months.
(g) AUDITS. Neither the IRS nor any foreign, state, local, or
other taxing authority has, during the past three (3) years, examined
or is in the process of examining any federal, foreign, state, local,
or other tax returns of Company or Company's Subsidiaries. To the
knowledge of Company, neither the IRS nor any foreign, state, local,
or other taxing authority is now asserting or threatening to assert
any deficiency or claim for additional taxes (or interest thereon or
penalties in connection therewith) except as set forth in the Company
Disclosure Statement.
(h) WITHHOLDING TAXES. All taxes which Company or Company's
Subsidiaries have been required to collect or withhold (other than
backup withholdings pursuant to Section 3406 of the Code) have been
duly withheld or collected and, to the extent required, have been paid
to the proper taxing authority. With respect to backup withholdings,
Company and the Company's Subsidiaries have exercised the degree of
care required under Section 6724 of the Code to avoid the imposition
of any penalties for failure to obtain certified and correct taxpayer
identification numbers from payees or for failure to make backup
withholdings.
(i) TAX ELECTIONS. The Company Disclosure Statement contains a
complete list of all material tax elections made by Company and
Company's Subsidiaries on any income tax return filed during the past
five (5) years which have the effect of deferring the realization of
an item of income to a period after the period for which the item of
income was reported on Company or Company's Subsidiaries financial
statements, or accelerating an item of deduction to a period prior to
the period for which the corresponding item of loss or expense was
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reported on Company's or Company's Subsidiaries financial statements.
Neither Company nor any of Company's Subsidiaries are a party to, or
bound by, any tax indemnity, tax sharing, or tax allocation agreement
other than as described in the Company Disclosure Statement.
(j) NO TAX LIENS. There are no liens for taxes (other than
for current taxes not yet due and payable) upon the assets of Company
or Company's Subsidiaries.
(k) AFFILIATED GROUP. Company has never been a member of an
affiliated group of corporations, within the meaning of Section 1504
of the Code ("AFFILIATED GROUP"), other than as a common parent
corporation, and Bank has never been a member of an Affiliated Group
except where Company or Bank was the common parent of the Affiliated
Group.
(l) PARACHUTE PROVISIONS. Neither Company nor any of Company's
Subsidiaries are a party to any current agreement, contract,
arrangement, or plan that has resulted or would result, separately or
in the aggregate, in the payment of any "excess parachute payments"
within the meaning of Section 280G of the Code other than as may
result from the acceleration of vesting under Company's Incentive Plan
or Recognition Plan.
3.15 COMPLIANCE WITH LAWS AND REGULATIONS. Neither Company nor any of
Company's Subsidiaries are in default under or in breach of any law,
ordinance, order, rule or regulation promulgated by any governmental agency
having authority over it, including specifically, but not limited to all
applicable federal and state laws, rules and regulations regulating the
conduct of a savings and loan business, banking, securities, truth-in-
lending, truth-in-savings, mortgage origination and servicing, usury, fair
credit reporting, consumer protection, occupational safety, civil rights,
employee protection, fair employment practices, fair labor standards, and
insurance; and Environmental Laws (as defined in Subsection 3.28(b)
(ENVIRONMENTAL LAWS)); except for violations that would not have a material
adverse effect on the financial condition, net income, business, or
operations of Company or any of Company's Subsidiaries, taken as a whole.
Company and Bank have complied in all material respects with all applicable
laws and regulations governing the conversion of Bank from a federal mutual
savings bank to a federal stock savings bank and the issuance of all of
Bank's capital stock to Company.
3.16 PERFORMANCE OF OBLIGATIONS. Company and the Company's
Subsidiaries have performed in all respects all material obligations
required to be performed by them to date and are not in default under or in
breach of any term or provision of any covenant, contract, lease, loan
servicing agreement or arrangement, indenture, or any other covenant to
which they are a party, are subject, or are otherwise bound, and no event
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has occurred which, with the giving of notice or the passage of time or
both, would constitute the default or breach, where the default or breach
would have a material adverse effect on the financial condition, net
income, business, or operations of Company and Company's Subsidiaries,
taken as a whole. Except for loans and leases made by Company or Company's
Subsidiaries in the ordinary course of business and identified on its books
and records as a non-performing or non-accrual credit, to the knowledge of
Company, no party with whom Company or Company's Subsidiaries have an
agreement which is of material importance to the financial condition, net
income, business, properties, or operations of Company or Company's
Subsidiaries are in default under that agreement.
3.17 EMPLOYEES. There are no controversies pending or threatened
between, or related to, Company, Bank, and any of their employees which
could have consequences materially adverse to the financial condition, net
income, business, or operations of Company and Company's Subsidiaries,
taken as a whole, or impair the ability of Company to perform its
obligations under this Agreement. Except as disclosed in the 1996
Financial Statements of Company, all material sums due for employee
compensation and benefits have been duly and adequately paid or accrued on
its books in accordance with generally accepted accounting principles.
Neither Company nor any of Company's Subsidiaries are a party to any
collective bargaining agreement with respect to any of its employees or any
labor organization to which its employees or any of them belong.
3.18 BROKERS AND FINDERS. Except for Company's agreement with The
Chicago Corporation, a copy of which is contained in the Company Disclosure
Statement, Company is not a party to any agreement with any broker, finder,
or investment banker relating to the transactions contemplated by this
Agreement, and neither the execution of this Agreement nor the consummation
of the transactions provided for in this Agreement will result in any
liability to any broker or finder.
3.19 MATERIAL CONTRACTS. Except as contained or described in the
Company Disclosure Statement, neither Company nor any of Company's
Subsidiaries are a party to any agreement or understanding described below:
(a) BORROWING COMMITMENTS. Any commitment made to Company or
Company's Subsidiaries permitting it to borrow money, any letter of
credit, any pledge, any security agreement, any lease (excluding
leases of real property otherwise identified in the Company Disclosure
Statement), any guarantee or any subordination agreement, or other
similar or related type of understanding, involving an amount in
excess of $50,000 as to which Company or Company's Subsidiaries are a
debtor, pledgor, lessee, or obligor;
(b) AGENCY RELATIONSHIPS. Any agreement or understanding
dealing with advertising, brokerage, licensing, dealership,
representative, or agency relationships in excess of $50,000;
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(c) BENEFIT PLANS. Any profit-sharing, group insurance, bonus,
deferred compensation, stock option, severance pay, pension,
retirement, or any other employee benefit plan or any plan, agreement,
contract, authorization, or arrangement pursuant to which any person
is or will become entitled to any benefit upon a change in control of
Company or Company's Subsidiaries;
(d) CORRESPONDENTS. Any written correspondent banking
contracts;
(e) ASSET TRANSACTIONS. Any agreement or understanding (i) for
the sale of its assets in excess of $50,000 outside of the ordinary
course of business; (ii) for the grant of any preferential right to
purchase any of its assets, properties, or rights in excess of
$50,000; or (iii) which requires the consent of any third party to the
transfer and assignment of any assets, properties, or rights in excess
of $50,000;
(f) LONG-TERM CONTRACTS. Any agreement or understanding which
obligates Company or Company's Subsidiaries for a period in excess of
one year, which has a value in excess of $50,000, to purchase, sell,
or provide services, materials, supplies, merchandise, facilities, or
equipment and which is not terminable without penalty on not more than
thirty (30) days' notice;
(g) CAPITAL EXPENDITURES. Any agreement or understanding for
any one capital expenditure or a series of capital expenditures, the
aggregate amount of which is in excess of $50,000;
(h) UNFUNDED LOAN COMMITMENTS. Any agreement or understanding
entered into to make a loan not yet fully disbursed or funded as of
June 30, 1996, to any person, wherein the undisbursed or unfunded
amount exceeds $100,000;
(i) AFFILIATE RELATIONSHIPS. Any agreement or understanding of
any kind, except for deposit relationships or loans made prior to June
30, 1996, with any current director or officer of Company or Company's
Subsidiaries or with any Affiliate or any member of the Immediate
Family of any director or officer;
(j) EMPLOYMENT AGREEMENTS. Any agreement or understanding for
the employment of any officer or employee which is not by its terms,
terminable by Company or Company's Subsidiaries without liability on
not more than thirty (30) days' notice, including any employee manual
or policy which may be construed under applicable law to grant
employment rights or any agreement implied by law or any agreement
providing for severance benefits;
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(k) TERMINABLE CONTRACTS. Any material agreement or
understanding which would be terminable by any other party other than
Company or Company's Subsidiaries as a result of the consummation of
the transactions contemplated by this Agreement;
(l) PARTICIPATION AGREEMENTS. Any loan participation agreement
with any other person entered into subsequent to June 30, 1995, in
excess of $50,000 and on the books at June 30, 1996; and
(m) OTHER CONTRACTS. Any agreement or understanding not
otherwise disclosed or excepted pursuant to this Section 3.19 which is
material to the financial condition, net income, business, or
operations of Company and Company's Subsidiaries, taken as a whole.
3.20 ABSENCE OF CERTAIN CHANGES. Since June 30, 1996, to the date of
this Agreement, the businesses of Company and the Company's Subsidiaries
have been conducted diligently and only in the ordinary course, in the same
manner as theretofore conducted, and there have not been:
(a) ADVERSE CHANGES. Any change in the financial condition, net
income, business, or operations of Company and Company's Subsidiaries,
taken as a whole, which has been materially adverse;
(b) CASUALTY LOSSES. Any damage, destruction, or loss (whether
or not covered by insurance) individually or in the aggregate
materially adversely affecting the financial condition, net income,
business, or operations of Company and Company's Subsidiaries, taken
as a whole;
(c) MATERIAL CONTRACTS. Any material contract, agreement,
license, or understanding which Company or Company's Subsidiaries have
entered into or to which Company or Company's Subsidiaries are a party
which has been terminated or amended other than in the ordinary course
of business, which termination or amendment would have a materially
adverse effect on the financial condition, net income, business, or
operations of Company and Company's Subsidiaries, taken as a whole;
(d) CAPITAL EXPENDITURES. Except for supplies or equipment
purchased in the ordinary course of business, any capital expenditure
exceeding individually or in the aggregate $50,000;
(e) LABOR DISPUTES. Any labor trouble, dispute or problem of
any character involving employees having a material adverse effect
upon the financial condition, net income, business, or operations of
Company and Company's Subsidiaries, taken as a whole;
(f) ACCOUNTING CHANGES. Any change in accounting methods or
practices by Company or Company's Subsidiaries, except as required by
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applicable governmental authorities or by generally accepted
accounting principles;
(g) WRITE-DOWNS. Any write-down in excess of $50,000 by Bank of
any of its assets which are not reflected in Company's statement of
financial condition as of June 30, 1996;
(h) EMPLOYEE BENEFITS. Any increase in the salary schedule,
compensation, rate, fee, or commission of Company or Bank employees,
officers, or directors, or the declaration, commitment, or obligation
of any kind for the payment by Company or Company's Subsidiaries of a
bonus or other additional salary, compensation, fee, or commission to
any person, except increases made in the ordinary course of business
and consistent with past practices;
(i) ASSET DISPOSITIONS. Any sale, assignment, or transfer of
any material asset, or any interest in a material asset, except in the
ordinary course of business;
(j) MORTGAGES. Any mortgage, pledge, or encumbrance of any
asset of Company other than liens for taxes not yet due, except in the
ordinary course of business and except as set forth in Sections 3.10
(TITLE TO ASSETS) and 3.11 (CONDITION OF REAL PROPERTY);
(k) WAIVERS. Any waiver or release of any material right or
claim of Company or Company's Subsidiaries except in the ordinary
course of business (including, but not limited to, loan, or lease
collection actions); and
(l) DISTRIBUTIONS. Any declaration, setting aside, or payment
of any dividend or distribution with respect to Company Common Stock
or the issuance of any shares of Company Common Stock or any other
securities of Company, except for shares issued upon exercise of the
options described in Subsection 3.2(a) (COMPANY'S CAPITAL STOCK).
3.21 LICENSES AND PERMITS. Company and Company's Subsidiaries each
hold all material licenses and permits required by federal, state, or local
governmental authorities that are necessary for the conduct of its
business, and the licenses and permits are in full force and effect, which
are listed in the Company Disclosure Statement. Bank is an approved
seller-servicer for FHLMC and each other mortgage investor identified in
the Company Disclosure Statement and in that capacity holds all necessary
permits, authorizations, or approvals of FHLMC necessary to carry on a
mortgage banking business. To the knowledge of Company, the properties of
Company and the Company's Subsidiaries are and have been maintained and
conducted, in all material respects, in compliance with all applicable laws
and regulations.
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3.22 REGULATORY ACTION. Neither Company nor any of Company's
Subsidiaries:
(a) GOVERNMENTAL INVESTIGATIONS. Have within the last five
years been charged with, or to Company's knowledge are under
governmental investigation with respect to, any actual or alleged
violation of any statute, ordinance, rule, regulation, guideline, or
standard except as disclosed in any report of examination; or
(b) PROCEEDINGS. Is the subject of any pending or, to Company's
knowledge, threatened proceeding by any regulatory authority having
jurisdiction over its business, properties, or operations.
3.23 LOANS AND INVESTMENTS. To the knowledge of Company, all loans
and investments of Bank are legal and enforceable in accordance with their
terms, except as may be limited by any bankruptcy, insolvency, moratorium,
or other laws affecting creditors rights generally or by the exercise of
judicial discretion, and each is authorized under applicable federal and
state laws and regulations. No loans or investments held by Company or
Company's Subsidiaries are as of June 30, 1996: (a) more than ninety (90)
days past due with respect to any scheduled payment of principal or
interest; (b) classified as "loss," "doubtful," "substandard," or "special
mention" by any federal regulators or by Company's or Company's
Subsidiaries' internal credit review system; (c) on a non-accrual status in
accordance with Company's or Company's Subsidiaries' loan review procedures;
or (d) "renegotiated loans," as that term is defined in Financial
Accounting Standard No. 15.
3.24 LOAN ORIGINATION AND SERVICING. In originating, underwriting,
servicing, purchasing, selling, transferring, and discharging loans,
mortgages, land contracts, and other contractual obligations, either for
its own account or for the account of others, Bank has complied with all
applicable terms and conditions of such obligations and with all applicable
laws, regulations, rules, contractual requirements, and procedures, except
for incidents of noncompliance that would not, individually or in the
aggregate, have a material effect on the financial condition, net income,
business, or operations of Company or any of Company's Subsidiaries.
3.25 LOAN GUARANTEES. To Company's knowledge, all guarantees of
indebtedness owed to any of Company's Subsidiaries, including but not
limited to those of the Federal Housing Administration, the Small Business
Administration, and other state and federal agencies, are valid and
enforceable, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, or other similar laws affecting
creditors' rights, and by the exercise of judicial discretion in accordance
with general principles applicable to equitable and similar remedies.
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3.26 EMPLOYEE BENEFIT PLANS.
(a) PLAN DISCLOSURES. The Company Disclosure Statement contains
a true and correct list of (i) every employee benefit plan within the
meaning of Section 3(3) of ERISA maintained by Company or the Bank for
any employee, or to which Company or the Bank is required to
contribute pursuant to any collective bargaining agreement to which
either of them is a party or by which either of them is bound; (ii)
all written bonus, percentage compensation, stock purchase and stock
option plans, to which Company or the Bank is a party or is subject;
(iii) all group insurance programs in effect for employees of Company
or the Bank not included in (i) above; and (iv) any other material
bonus, profit-sharing, retirement, insurance, death, or other programs
or plans not disclosed pursuant to (i), (ii) or (iii) above (each an
"EMPLOYEE BENEFIT PLAN"). Company has furnished to Acquiror true and
complete copies of all Employee Benefit Plans, as well as any summary
plan description for each benefit plan and, if applicable, the most
recent actuarial valuation for each benefit plan. All expenses
associated with each Employee Benefit Plan which were incurred during
the fiscal year ended June 30, 1996, have been accrued on the books of
Company in accordance with generally accepted accounting principles
and are reflected in the 1996 Financial Statements. All expenses
associated with each Employee Benefit Plan which were incurred since
June 30, 1996, have been accrued on the books of Company in accordance
with generally accepted accounting principles.
(b) PENSION BENEFIT PLANS. Each Employee Benefit Plan which
is a pension benefit plan within the meaning of Section 3(2) of ERISA
has been duly authorized and adopted by the Board of Directors of
Company and/or the Bank. With respect to each such pension benefit
plan, Company and/or the Bank is in material compliance with the
requirements prescribed by all statutes, governmental or court orders,
governmental rules or regulations currently in effect, including but
not limited to ERISA and the Code, applicable to each such plan or
arrangement. Subject to extensions of time for approval as permitted
under Code Section 401(b) and applicable IRS announcements, each such
pension benefit plan, which is intended to be a qualified plan under
Section 401(a) of the Internal Revenue Code, and all trusts created
thereunder, has been determined by the Internal Revenue Service to be
a qualified plan under Section 401(a) and exempt from tax under
Section 501(a) of the Code, respectively. All material government
reports and filings required by law have been properly and timely
filed and all information required to be distributed to plan
participants or beneficiaries has been distributed. Minimum funding
standards have been met for each year to which Section 302 of ERISA or
Section 412 of the Code was applicable and no waiver of minimum
funding standards has been requested for any year with regard to any
such pension benefit plan. The present value of all accrued benefits
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under each plan did not, as of the latest valuation date, exceed the
then current value of the assets of such plan allocable to such
accrued benefits, based upon the actuarial assumptions currently used
for the plan. To the knowledge of Company and/or the Bank no
condition exists that could constitute grounds for termination of any
such pension benefit plan under Section 4042 of ERISA. To the
knowledge of Company and/or the Bank, no prohibited transaction
(within the meaning of Section 4975 of the Code) or party-in-interest
transaction (within the meaning of Section 406 of ERISA) has occurred
or exists with respect to any Employee Benefit Plan which could
subject any plan to liability under Sections 409 or 502 of ERISA or
Section 4975 of the Code which would have a material adverse effect on
the financial condition of Company and the Bank, taken as a whole, or
which would adversely affect the qualified status of each plan. To
the extent applicable, all costs of each Employee Benefit Plan have
been provided for on the basis of consistent methods in accordance
with sound actuarial assumptions and practices.
(c) PLAN REPORTS. Company or the Bank has made available to
Acquiror for each such pension benefit plan, where applicable: (i) a
copy of the Form 5500 which was filed in each of the most recent three
plan years, including, without limitation, all schedules thereto and
all financial statements with attached opinions of independent
accountants; (ii) the most recent determination letter from the IRS;
(iii) the Statement of Assets and Liabilities as of the most recent
valuation date; and (iv) the Statement of Changes in Fund Balance and
Financial Position or the Statement of Changes in Net Assets Available
for Benefits under each such plan for the most recently ended plan
year. The documents referred to in clauses (iii) and (iv) fairly
present the financial condition of each such plan as of such dates and
the results of operations of each such plan.
(d) WELFARE BENEFIT PLANS. With respect to any Employee Benefit
Plan that is an "employee welfare plan" as defined in ERISA Section
3(l), and except as disclosed in the Company Disclosure Statement:
(i) there are no retiree benefits provided or payable; (ii) each plan
that is a "group health plan" (as defined in Code Section 5000(b)(1))
complies and in each case has complied in all respects with the
applicable requirements of ERISA Sections 601 and 602, Code Section
162(k) (through December 31, 1988) and Code Sections 4980(B)
(commencing on January 1, 1989); and (iii) subject to reasonable
notice requirements that may exist within plans, each plan that covers
current and former employees may be amended or terminated at any time
by Company or its successor on or at any time after the Effective
Time.
(e) COMPLIANCE. Each employee welfare plan disclosed in the
Company Disclosure Statement (i) has been duly adopted and maintained
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in all material respects in accordance with its respective provisions;
and (ii) has complied and is in compliance in all material respects
with the applicable provisions of law, including the requirements of
ERISA, and the Code and the regulations promulgated thereunder by the
IRS and the United States Department of Labor. With respect to each
welfare plan, all material government reports and filings required by
law have been properly and timely filed and all information required
to be distributed to plan participants and beneficiaries has been
distributed, and all contributions required thereunder have been made
in a timely fashion.
(f) MULTIEMPLOYER PLANS. No Employee Benefit Plan is a
"multiemployer plan" within the meaning of Section 3(37)(A) of ERISA.
(g) NO DEFINED BENEFIT PLANS. Since January 1, 1974, neither
Company nor any of Company's Subsidiaries have been a sponsor of, or
contributor to, a "defined benefit plan" within the meaning of Section
3(35) of ERISA with respect to its employees.
(h) REQUIRED CONTRIBUTIONS. Company or the Bank has made when
due all contributions required under any Employee Benefit Plan and
under applicable laws and regulations.
(i) PAYMENTS DUE. There are no payments which have become due
from any Employee Benefit Plan, the trusts created thereunder, or from
the Company or the Bank which have not been paid through normal
administrative procedures to the plan participants or beneficiaries
entitled thereto, except for claims for benefits for which
administrative claims procedures under such plan have not been
exhausted.
(j) NO FUNDING DEFICIENCY. No Employee Benefit Plan which is
intended to be a qualified plan under Section 401(a) of the Internal
Revenue Code and no trust created thereunder has incurred, subsequent
to June 30, 1974, an "accumulated funding deficiency" as defined in
Section 412(a) of the Internal Revenue Code and Section 302 of ERISA
(whether or not waived).
3.27 COMPANY SEC REPORTS. Company has filed on a timely basis all
proxy statements, reports, and other documents required to be filed by it
under the 1934 Act after June 30, 1996 (collectively, the "COMPANY SEC
REPORTS"). The Company Disclosure Statement contains copies of Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996, and
all quarterly and periodic reports and proxy statements filed under the
1934 Act by Company after that date, each as filed with the SEC. Each
Company SEC Report was in substantial compliance with the requirements of
its respective report form and did not, on the date of filing or as
subsequently amended, as applicable, contain any untrue statement of a
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material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.28 ENVIRONMENTAL CONDITIONS.
(a) HAZARDOUS SUBSTANCES. For purposes of this Agreement,
"HAZARDOUS SUBSTANCE" has the meaning set forth in Section 9601 of the
Comprehensive Environmental Response Compensation and Liability Act of
1980, as amended, 42 U.S.C.A. <Section> 9601, et seq. ("CERCLA"), and
also includes any substance regulated by or subject to any
Environmental Law (as defined below), and any other pollutant,
contaminant, or waste, including, without limitation, petroleum,
asbestos, radon, and polychlorinated biphenyls.
(b) ENVIRONMENTAL LAWS. For purposes of this Agreement,
"ENVIRONMENTAL LAWS" means all laws (civil or common), ordinances,
rules, regulations, guidelines, and orders that: (i) regulate air,
water, soil, or solid waste management, including the generation,
release, containment, storage, handling, transportation, disposal, or
management of Hazardous Substances; (ii) regulate or prescribe
requirements for air, water, or soil quality; (iii) are intended to
protect public health or the environment; or (iv) establish liability
for the investigation, removal, or cleanup of, or damage caused by,
any Hazardous Substance.
(c) OWNED OR OPERATED PROPERTY. With respect to: (1) the real
estate owned or leased by Company or any of Company's Subsidiaries or
used in the conduct of their businesses; (2) other real estate
acquired by Company's Subsidiaries in satisfaction of a debt
previously contracted; (3) real estate held and administered in trust
by any of Company's Subsidiaries; and (4) to Company's knowledge, any
real estate formerly owned or leased by Company or any of Company's
Subsidiaries (for purposes of this Section, properties described in
any of (1) through (4) are collectively referred to as "PREMISES"):
(i) CONSTRUCTION AND CONTENT. To Company's knowledge, none
of the Premises are constructed of, or contain as a component
part, any material which (either in its present form or as it may
reasonably be expected to change through aging or normal use)
releases or may release any substance, whether gaseous, liquid,
or solid, that is a Hazardous Substance or is known to be (either
by single exposure or by repeated or prolonged exposure)
injurious or hazardous to the health of persons occupying the
Premises at levels determined to be dangerous to human health.
(ii) USES OF PREMISES. To Company's knowledge, no part of
the Premises have been used for the generation, manufacture,
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handling, storage, disposal, or management of Hazardous
Substances.
(iii) UNDERGROUND STORAGE TANKS. To Company's knowledge,
the Premises do not contain, and have never contained, any
underground storage tanks. With respect to any underground
storage tank that is listed in the Company Disclosure Statement
as an exception to the foregoing, to Company's knowledge, each
such underground storage tank presently or previously located on
Premises are or has been maintained or removed, as applicable, in
compliance with all applicable Environmental Laws, and has not
been the source of any release of a Hazardous Substance to the
environment which has not been remediated.
(iv) ABSENCE OF CONTAMINATION. To Company's knowledge, the
Premises do not contain, and are not contaminated by, a Hazardous
Substance in a quantity which under applicable laws and
regulations would require Company to clean-up the contamination
or to file a report with any governmental agency giving notice of
the contamination.
(v) ENVIRONMENTAL SUITS AND PROCEEDINGS. There is no
action, suit, investigation, liability, inquiry, or other
proceeding, ruling, order, notice of potential liability, or
citation against Company, any of Company's Subsidiaries, or any
of Company's Real Properties pending, or to Company's knowledge
threatened, or previously asserted under, or as a result of any
actual or alleged failure to comply with any requirement of, any
Environmental Law. Without limiting the generality of this
Section, there is no basis for any claim against Company, any of
Company's Subsidiaries, or any of their respective properties or
assets under Section 107 of CERCLA or any similar provision of
any other Environmental Law.
(d) LOAN PORTFOLIO. With respect to any real estate securing
any outstanding loan or related security interest and any owned real
estate acquired in full or partial satisfaction of a debt previously
contracted, to Company's knowledge:
(i) INVESTIGATION. Company and each of Company's
Subsidiaries have complied in all material respects with any
policies adopted by their respective boards of directors (as such
policies may have been in effect from time to time and as
disclosed in the Company Disclosure Statement), and all
applicable laws and regulations, concerning the investigation of
each such property to determine whether or not there exists or is
reasonably likely to exist any Hazardous Substance on, in, or
under such property and whether or not a release of a Hazardous
Substance has occurred at or from such property.
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(ii) NO KNOWN CONTAMINATION. No such property contains or
is contaminated by any quantity of any Hazardous Substance from
any source.
3.29 PROXY STATEMENT.
(a) ACCURATE INFORMATION. None of the information to be
supplied by Company for inclusion, or included, in any Transaction
Document will:
(i) Be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the
statements therein not misleading (1) at the respective times
such Transaction Documents are filed; and (2) with respect to the
Proxy Statement, when it is mailed.
(ii) With respect to the Proxy Statement, as it may be
amended or supplemented, at the time of the Stockholders'
Meeting, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the
solicitation of any proxy for the Stockholders' Meeting.
(b) COMPLIANCE OF FILINGS. All documents which Company is
responsible for filing with any regulatory agency in connection with
the Merger will comply as to form in all material respects with the
provisions of applicable law.
3.30 INSIDER INTERESTS. For purposes of this Agreement, the term
"COMPANY-RELATED PERSON" shall mean any director or executive officer of
Company or any of Company's Subsidiaries, their spouses and children, any
person who is a member of the same household as such persons, and any
corporation, partnership, proprietorship, trust, or other entity of which
any such persons, alone or together, have Control.
(a) INSIDER LOANS. No Company-Related Person has any loan,
credit, or other contractual arrangement outstanding with Company or
Company's Subsidiaries which does not conform to applicable rules and
regulations of the OTS or the Federal Reserve Board.
(b) CONTROL OF MATERIAL ASSETS. Other than in a capacity as a
shareholder, director, or executive officer of Company or any of
Company's Subsidiaries, no Company-Related Person owns or controls any
material assets or properties which are used in the business of
Company or any of Company's Subsidiaries.
(c) CONTRACTUAL RELATIONSHIPS. Other than ordinary and
customary banking relationships, no Company-Related Person has any
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contractual relationship with Company or any of Company's
Subsidiaries.
(d) LOAN RELATIONSHIPS. No Company-Related Person has any
outstanding loan or loan commitment from, or on whose behalf an
irrevocable letter of credit has been issued by, Company or any of
Company's Subsidiaries in a principal amount of $10,000 or more.
3.31 FAIRNESS OPINION. The board of directors of Company has
received the written opinion of The Chicago Corporation, to the effect that
the Merger Consideration to be received by stockholders of Company in the
Merger is fair to the stockholders from a financial point of view, and the
opinion has not been withdrawn, modified, or revoked.
3.32 DUTIES AS FIDUCIARY. Bank has performed all of its duties in
any capacity as custodian, escrow agent, receiver, or other fiduciary in a
fashion that complies in all material respects with all applicable laws,
regulations, orders, agreements, wills, instruments, and common law
standards. Bank has not received notice of any claim, allegation, or
complaint from any person that Bank failed to perform these fiduciary
duties in the required manner.
3.33 CHANGE IN BUSINESS RELATIONSHIPS. Neither Company nor any of
Company's Subsidiaries has notice, whether on account of the Merger or
otherwise, that (i) any customer, agent, representative, or supplier of
Company or any of Company's Subsidiaries intends to discontinue, diminish,
or change its relationship with Company or any of Company's Subsidiaries,
the effect of which would be material to the business of Company or any of
Company's Subsidiaries; or (ii) any executive officer of Company or any of
Company's Subsidiaries intends to terminate his or her employment.
3.34 PUBLIC COMMUNICATIONS; SECURITIES OFFERING. No annual report,
quarterly report, proxy material, press release, or other communication
previously sent or released by Company or any of Company's Subsidiaries to
Company's shareholders or the public was false or misleading with respect
to any material fact, or omitted to state any material fact necessary to
make the statements therein not misleading.
3.35 NO INSIDER TRADING. Company has reviewed its stock transfer
records since January 1, 1996, and has questioned its directors and
executive officers concerning known stock transfers since that date. Based
upon that investigation, to Company's knowledge: (i) no director or officer
of Company or any of Company's Subsidiaries; (ii) no person related to any
such director or officer by blood or marriage and residing in the same
household; and (iii) no person knowingly provided material nonpublic
information by any one or more of these persons has purchased or sold, or
caused to be purchased or sold, any shares of Company Common Stock during
any period when Company was in possession of material nonpublic information
or in violation of any applicable provision of the 1934 Act.
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3.36 TRUE AND COMPLETE INFORMATION. No schedule, statement, list,
certificate, or other information furnished or to be furnished by Company
in connection with this Agreement, including the Company Disclosure
Statement, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make the
statements contained therein, in light of the circumstances in which they
are made, not misleading.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror represents and warrants to Company that, except as otherwise
set forth in the disclosure statement dated November 6, 1996, constituting
Exhibit B (collectively, the "ACQUIROR DISCLOSURE STATEMENT"), which has
been delivered to Company prior to the execution of this Agreement:
4.1 ORGANIZATION AND QUALIFICATION. Acquiror and MergerSub are
corporations duly organized, validly existing, and in good standing under
the laws of the State of Michigan. Acquiror's Bank is a Michigan banking
corporation duly organized, validly existing, and in good standing under
the Banking Code. Acquiror's Bank is regulated by the FDIC and its
deposits are primarily insured by the Bank Insurance Fund in the manner and
to the extent provided by law. Neither the scope of the business of
Acquiror or of Acquiror's Bank nor the location of any of their respective
properties requires that either of them be licensed to do business in any
jurisdiction other than the State of Michigan. MergerSub has no material
assets, has never conducted any business activities, and is not a party to
any contract, agreement, or understanding other than this Agreement.
4.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Acquiror and MergerSub
each have full corporate power and authority to execute, deliver, and
perform this Agreement and to consummate the transaction contemplated by
this Agreement, subject to any governmental approvals required by law. The
execution, delivery, and performance of this Agreement and the consummation
of the transactions contemplated by this Agreement have been duly
authorized and approved by the boards of directors of Acquiror and
MergerSub. No other corporate proceedings on the part of Acquiror or
MergerSub are necessary to authorize this Agreement or to consummate the
transactions contemplated by this Agreement. This Agreement has been duly
and validly executed and delivered by Acquiror and MergerSub and
constitutes the valid and binding agreement of Acquiror and MergerSub,
enforceable against either of them in accordance with its terms, except
insofar as the enforceability may be limited by applicable bankruptcy,
insolvency, receivership, and other laws affecting the rights of creditors
generally.
4.3 NO CONFLICT OR VIOLATION. Neither the execution nor delivery of
this Agreement nor the consummation by Acquiror and MergerSub of the
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transactions contemplated by this Agreement nor the compliance with and
fulfillment of the terms and provisions of this Agreement by Acquiror and
MergerSub will conflict with, or result in a breach of, any term,
condition, or provision of, or constitute a default under:
(a) CORPORATE DOCUMENTS. The Articles of Incorporation or
Bylaws of Acquiror or MergerSub;
(b) MATERIAL AGREEMENTS. Any material agreement or instrument
to which Acquiror or Acquiror's Bank is a party or by which either of
them is bound; or
(c) ORDERS; LIENS. Any material order, judgment, or decree to
which Acquiror or Acquiror's Bank is subject, or result in the
creation of any material lien, charge, or encumbrance on any of their
respective properties.
4.4 PROXY STATEMENT.
(a) ACCURATE INFORMATION. None of the information to be
supplied by Acquiror for inclusion, or included, in any Transaction
Document will:
(i) Be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the
statements therein not misleading (1) at the respective times
such Transaction Documents are filed; and (2) with respect to the
Proxy Statement, when it is mailed.
(ii) With respect to the Proxy Statement, as it may be
amended or supplemented, at the time of the Stockholders'
Meeting, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the
solicitation of any proxy for the Stockholders' Meeting.
(b) COMPLIANCE OF FILINGS. All documents that Acquiror is
responsible for filing with any regulatory agency in connection with
the Merger or the Bank Consolidation will comply as to form in all
material respects with the provisions of applicable law.
4.5 NECESSARY CAPITAL. Based on the financial condition of Company
as reflected in the 1996 Financial Statements, Acquiror has the necessary
capital required by the regulations of the Federal Reserve Board and FDIC
to consummate the transactions contemplated by this Agreement.
4.6 COMPLIANCE WITH APPLICABLE LAW. Acquiror and Acquiror's Bank
each holds all material licenses, franchises, permits, and authorizations
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necessary for the lawful conduct of its business, the lack of which would
prevent Acquiror from obtaining regulatory approval to consummate the
Merger. Acquiror and Acquiror's Bank has each complied with, and is not in
material default under, any applicable law, statute, order, rule,
regulation, policy, and/or guideline of any federal, state, or local
governmental authority the violation of which would prevent Acquiror from
obtaining regulatory approval to consummate the Merger. Neither Acquiror
nor Acquiror's Bank has received notice of a violation of, and does not
know of any violation of, any applicable law, statute, order, rule,
regulation, policy, and/or guideline of any federal, state, or local
governmental authority the violation of which would prevent Acquiror from
obtaining regulatory approval to consummate the Merger.
4.7 LITIGATION. There is no private or governmental suit, claim,
action, or proceeding pending or threatened, or which reasonably should be
expected to be commenced, against Acquiror, its subsidiaries or against any
of their directors or officers that would impair the ability of Acquiror to
perform its obligations under this Agreement.
4.8 REGULATORY APPROVALS. Acquiror does not know of any circumstances
which would prevent it or Company from obtaining approval of the Federal
Reserve Board, the FDIC, the OTS, or the FIB of the transactions
contemplated by this Agreement, except for their customary review of
competitive effects of the Merger under applicable laws and regulations.
4.9 NO FACT OR CONDITION, ETC. To the knowledge of Acquiror, no fact
or condition exists which Acquiror has reason to believe will prevent it
from obtaining all governmental consents and approvals required to
consummate the Merger or the Bank Consolidation.
4.10 TRUE AND COMPLETE INFORMATION. No schedule, statement, list,
certificate, or other information furnished or to be furnished by Acquiror
in connection with this Agreement, including the Acquiror Disclosure
Statement, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make the
statements contained therein, in light of the circumstances in which they
are made, not misleading.
ARTICLE V - ADDITIONAL COVENANTS AND AGREEMENTS
Subject to the terms and conditions of this Agreement, Company and
Acquiror further agree that:
5.1 ACCESS TO INFORMATION.
(a) PERMITTED INVESTIGATION. Between the date of this Agreement
and the Effective Time, Company will afford, and will cause Bank to
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afford, to the officers, accountants, attorneys, and authorized
representatives of Acquiror and Acquiror's Bank reasonable access
during normal business hours to the banking offices, personnel,
advisors, consultants, properties, examination reports (subject to
regulatory approval), contracts, commitments, books and records of
Company and Company's Subsidiaries, whether the documents are located
on the premises of Company or elsewhere. Company shall furnish
Acquiror and Acquiror's Bank with all the statements (financial and
otherwise), records, examination reports (to the extent permitted or
authorized by the OTS), and original documents or copies, and other
information concerning the business and affairs of Company and the
Company's Subsidiaries as Acquiror or Acquiror's Bank shall from time
to time reasonably request. Company further agrees to cause its
accountants, attorneys, and other persons as the parties may agree
upon to fully cooperate with Acquiror and Acquiror's Bank and its
representatives in connection with the right of access granted in this
Agreement.
(b) CONFIDENTIALITY. All information and documents to which
Acquiror or Acquiror's Bank is given access pursuant hereto shall be
subject to the Confidentiality Agreement executed between the parties
dated August 2, 1996. All information furnished by Company or
Company's Subsidiaries to Acquiror or Acquiror's Bank pursuant hereto
shall be treated as the sole property of Company or Company's
Subsidiaries until consummation of the Merger contemplated by this
Agreement and, if the Merger shall not occur, Acquiror and Acquiror's
Bank shall return to Company or Company's Subsidiaries all documents
or other materials containing, reflecting, or referring to this
information, shall use its best efforts to keep confidential all of
this information, and shall not directly or indirectly use this
information for any competitive or other commercial purpose. The
obligation to keep this information confidential shall continue for
five (5) years from the date the proposed Merger is abandoned, but
shall not apply to:
(i) Any information which was already in the possession of
Acquiror or Acquiror's Bank prior to its disclosure by Company or
Company's Subsidiaries, information which was then generally
known to the public, information which became known to the public
through no fault of Acquiror or Acquiror's Bank or its agents;
(ii) Any information disclosed in accordance with an order
of a court of competent jurisdiction;
(iii) Any information received from any other person who
is not affiliated with a party and who is not under any
obligation to keep such information confidential; or
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(iv) Any information reasonably required to be included in
any filing or application required by any governmental or
regulatory agency, including without limitation Acquiror's
application to the Federal Reserve Board, Acquiror's or Company's
reports filed with the SEC, and Acquiror's or Company's annual
report and proxy statement.
(c) NO PRESUMPTION. Company and Acquiror each acknowledge that
each competes with the other in certain lines of business in a similar
market and each agrees that the fact that a party or a party's
Affiliates may in the future conduct business with a present customer
of the other party shall not, in and of itself, create any presumption
or inference that the party or its Affiliates have used confidential
information.
(d) ACQUIROR'S NONPUBLIC INFORMATION. All nonpublic information
and documents about Acquiror or Acquiror's Bank to which Company or
its agents are provided or given access by Acquiror pursuant to this
Agreement shall forever be treated confidentially and shall be treated
as the sole property of Acquiror and Acquiror's subsidiaries.
(e) PROHIBIT INSIDER TRADING. Acquiror and Company each shall
take responsible steps to assure that any person who receives
nonpublic information concerning the Merger or the other party will
(i) treat the information confidentially as provided in this Section;
and (ii) not directly or indirectly buy or sell, or advise other
persons to buy or sell, the other party's stock until such information
is properly disclosed to the public.
5.2 CONDUCT OF BUSINESS BY COMPANY. Company shall operate its
business and cause each of Company's Subsidiaries to operate its business
in the ordinary course and consistent with past practices. Company will
use all reasonable efforts to preserve intact the present business
organizations of Company and Company's Subsidiaries and maintain in effect
all licenses, permits, and approvals of governmental authorities and
agencies necessary for the conduct of its present business. Except as
otherwise contemplated by this Agreement or as otherwise consented to or
approved by Acquiror in writing, neither Company nor Company's Subsidiaries
shall:
(a) NO ISSUE OR SALE. Issue, sell, purchase, or redeem or
commit to issue, sell, purchase, or redeem any shares of its capital
stock other than shares issued pursuant to the exercise of stock
options outstanding on the date of this Agreement and the conversion
of outstanding restricted shares of Company Common Stock for
unrestricted shares pursuant to the Recognition Plan; or grant any
options, warrants, or rights to purchase shares of its capital stock;
or issue, sell, or authorize the issuance or sale of securities of any
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kind convertible into or exchangeable for shares of its capital stock;
or
(b) DIVIDEND RESTRICTIONS. Declare, set aside, or pay any
dividend or make any distribution in respect of its capital stock in
excess of $0.11 per quarter, in cash, from Company to its
stockholders. Company's Subsidiaries may pay dividends to Company in
amounts sufficient to enable Company to pay its ordinary operating
expenses and its accrued liabilities, including (but not limited to)
litigation expenses and accounting, legal, printing, investment
banking, environmental testing and regulatory application fees,
expenses and costs relating to the transactions contemplated by this
Agreement.
(c) CORPORATE DOCUMENTS. Amend its Certificate or Articles of
Incorporation (in the case of Company or Non-Bank Subsidiary), Charter
(in the case of Bank), or Bylaws, except as may be contemplated by
this Agreement;
(d) OTHER CAPITAL STOCK INTERESTS. Issue or agree to issue any
additional shares of its capital stock or issue or create any
warrants, obligations, subscriptions, options, convertible security,
or other commitments under which additional shares of its capital
stock of any class might be directly or indirectly authorized, issued,
or transferred from treasury, except in connection with options
previously granted under the Incentive Plan;
(e) COMPENSATION. Make any general or unusual increase in
compensation or rate of compensation payable or to become payable to
hourly, salaried, or commissioned employees or officers, except for
those which are normal, reasonable, and consistent with past practices
or as provided for by contracts in existence and contained in the
Company Disclosure Statement.
(f) EMPLOYMENT AGREEMENTS. Enter into any express or implied,
written or oral, employment agreement which by its terms cannot be
terminated on thirty (30) days' notice or less without penalty;
(g) EMPLOYEE BENEFITS. Accrue, set aside, or pay to any
officer or employee any bonus, profit-sharing, severance, retirement,
insurance, death, fringe benefit, or other extraordinary compensation
(except pursuant to pension, profit-sharing, bonus, and other fringe
benefit plans, agreements, and arrangements presently in effect and in
accordance with past practices) nor adopt or amend any employee
benefit plan (except that Bank may make amendments to its employee
benefit plans as are specifically contemplated by this Agreement);
(h) DERIVATIVES. Commit to purchase, purchase, or otherwise
acquire any high risk derivative or synthetic mortgage product or
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enter into any interest rate swap transaction, other than the purchase
and sale of collateralized mortgage obligations in the ordinary course
of business and consistent with past practices;
(i) INSIDER LOANS. Make any loan or make any loan commitment,
renewal, or extension to any person which would, when aggregated with
all outstanding loans, commitments, renewals, or extensions made by
Bank to the person and the person's Immediate Family and Affiliates,
exceed $250,000; PROVIDED, HOWEVER, that this restriction shall not
apply to any renewals or advances on existing lines of credit or the
renegotiation or restructuring of any problem or delinquent loan or to
the making of any residential mortgage loan made with adjustable
rates;
(j) ACQUISITIONS. Acquire any business entity, except as it
relates to a foreclosure or other exercise of creditor's rights in the
usual and ordinary course of its business;
(k) EXTRAORDINARY TRANSACTIONS. Enter into any contract or
agreement to buy, sell, exchange, or otherwise deal in any assets or
series of assets in a single transaction in excess of $100,000 in
aggregate value (including, but not limited to, options or commodities
or any tangible real or personal properties of Company or Company's
Subsidiaries), except for the origination, purchase, and sale of
mortgage loans and loan participations and the purchase and sale of
readily marketable investment securities in the ordinary course of
business and consistent with past practices, and sales of real estate
owned and other repossessed properties or acceptance of a deed in lieu
of foreclosure;
(l) CAPITAL EXPENDITURES. Make any one capital expenditure or
any series of related capital expenditures (other than emergency
repairs and replacements), the amount or aggregate amount of which (as
the case may be) is in excess of $50,000;
(m) NO BRANCHING. File, withdraw, or fail to renew any
applications for additional branches or to relocate operations from
existing locations;
(n) NO EXTRAORDINARY LIABILITIES. Create or incur any
liabilities in excess of $50,000, other than liabilities incurred in
the ordinary course of business or as contemplated or permitted by or
in connection with this Agreement and the consummation of the Merger;
(o) NO PLEDGES. Create or incur or suffer to exist any
mortgage, lien, pledge, security interest, charge, encumbrance, or
restriction of any kind against or in respect of any property or right
of Company or Company's Subsidiaries securing any obligation in excess
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of $50,000, except for pledges or security interests given in
connection with the acceptance of repurchase agreements or government
deposits;
(p) MATERIAL CONTRACTS. Make or become a party to any contract
or commitment in excess of $50,000, or renew, extend, amend, or modify
any contract or commitment in excess of $50,000, except in the usual
and ordinary course of business or as otherwise contemplated or
permitted by this Agreement;
(q) NO DISCHARGES. Discharge or satisfy any mortgage, lien,
charge, or encumbrance other than as a result of the payment of
liabilities in accordance with their terms, or except in the ordinary
course of business, if the cost to Company or Company's Subsidiaries
to discharge or satisfy any mortgage, lien, charge, or encumbrance is
in excess of $50,000, unless the discharge or satisfaction is covered
by general or specific reserves;
(r) SATISFACTION OF LIABILITIES. Pay any obligation or
liability, absolute or contingent, in excess of $50,000 except
liabilities shown on the 1996 Financial Statements or except in the
usual and ordinary course of business or in connection with the
transactions contemplated by this Agreement;
(s) CLAIMS AND SETTLEMENTS. Institute, settle, or agree to
settle any claim, action, or proceeding involving an expenditure in
excess of $50,000 before any court or governmental body;
(t) REAL ESTATE. Invest in any real estate, except for
investments in real estate owned as a result of foreclosure or deed in
lieu of foreclosure;
(u) ENVIRONMENTAL PRECAUTIONS. Take title to any real estate,
as legal or beneficial owner or as trustee, without first obtaining an
environmental assessment of the property;
(v) MATERIAL PURCHASES. Enter into or amend any continuing
contract or series of related contracts in excess of $50,000 for the
purchase of materials, supplies, equipment, or services which cannot
be terminated without cause and without payment of any amount as a
penalty, bonus, premium, or other compensation for termination except
as contemplated or permitted by this Agreement;
(w) INSIDER CONTRACTS. Enter into or amend any contract,
agreement, or other transaction with any officer, director, or
principal shareholder of Company or any Affiliate of the person except
as contemplated or permitted by this Agreement;
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(x) POLICIES AND PROCEDURES. Change any basic policies and
practices with respect to liquidity management, asset/liability
management or interest rate sensitivity, cash flow planning,
marketing, deposit origination, lending, budgeting, profit and tax
planning, personnel practices, accounting, or any other material
aspect of its business or operations, except for any changes which, in
the opinion of management of Company, are required to respond to then
current market conditions (as to deposit origination and lending only)
and requirements of applicable governmental authorities; or
(y) DEFAULTS. Knowingly default in any material respect under
any agreement or understanding to which Company or Company's
Subsidiaries are a party, and which, individually or together with
other agreements or understandings with respect to which a default
exists, would materially adversely affect the financial condition, net
income, business, or operations of Company and Company's Subsidiaries,
taken as a whole.
5.3 REGULATORY MATTERS.
(a) PROXY STATEMENT. Acquiror and Company will cooperate in the
preparation and filing by Company as soon as practicable of the Proxy
Statement with the SEC under the 1934 Act to be used by Company for
the solicitation of proxies in order to approve this Agreement and the
Merger and will use their best efforts to obtain permission from the
SEC to mail the Proxy Statement to Company's stockholders as soon as
possible following the execution of this Agreement.
(b) REGULATORY FILINGS. Acquiror and Company will cooperate
with each other and use all reasonable efforts to prepare as
expeditiously as possible all necessary documentation, to effect all
necessary filings, and to obtain at the earliest practicable date all
necessary permits, consents, approvals, and authorizations of all
third parties and governmental bodies necessary to consummate the
transactions contemplated by this Agreement. Acquiror and Company
shall each have the right to review and approve in advance all
characterizations of the information relating to Acquiror or Company,
as the case may be, and any of their respective subsidiaries, which
appear in any filing made in connection with the transactions
contemplated by this Agreement with any governmental body. This
Section shall not, however, obligate Acquiror or Acquiror's Bank to
divest all or any part of its current business operations.
(c) NECESSARY INFORMATION. Acquiror and Company will furnish
each other with all information concerning themselves, their
subsidiaries, directors, officers, and stockholders and other matters
as may be necessary or advisable in connection with the Proxy
Statement, or any other statement or application made by or on behalf
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of Acquiror or Company to any governmental body in connection with the
Merger and the other transactions contemplated by this Agreement.
5.4 STOCKHOLDER APPROVAL. Company will take all steps necessary to
duly call, give notice of, convene, and hold the Stockholders' Meeting as
soon as practicable after the date of this Agreement. At the Stockholders'
Meeting, in the Proxy Statement, and in all proxy materials used in
connection with the meeting, the board of directors of Company shall
recommend adoption of this Agreement and approval of the Merger by the
stockholders; provided, that the recommendation is not inconsistent with
the proper exercise of the fiduciary duties of the directors to the
stockholders of Company.
5.5 UPDATED FINANCIAL INFORMATION. As soon as reasonably available,
Company shall deliver to Acquiror complete copies of all Quarterly Reports
on Form 10-QSB, Current Reports on Form 8-K, Annual Reports on Form 10-KSB,
and any amendments of past filings, as and when these reports are filed
hereafter with the SEC pursuant to the 1934 Act. The financial statements
contained in the reports will be prepared in accordance with generally
accepted accounting principles consistently applied (except for changes
required by applicable governmental authorities or by generally accepted
accounting principles) and will present fairly the consolidated financial
condition of Company and the Company's Subsidiaries as of the dates
indicated and for the periods then ended.
5.6 ACQUISITION PROPOSALS. Company shall not, nor shall it authorize
or permit any of Company's Subsidiaries, or any of their respective
officers, directors, investment bankers, attorneys, representatives, or
agents to initiate, solicit, or encourage, directly or indirectly, any
inquiries or the making of any proposal with respect to a tender offer,
exchange offer, merger, consolidation, sale of shares, sale of assets, or
assumption of liabilities not in the ordinary course, or other business
combination involving Company or Company's Subsidiaries other than the
Merger (an "ACQUISITION PROPOSAL"). Company shall notify Acquiror
immediately of the details of any indication of interest from any persons
with respect to the foregoing of which any executive officer or director of
Company becomes aware. Notwithstanding the foregoing, nothing in this
Agreement shall prohibit Company's board of directors from fulfilling their
fiduciary duties under Delaware or federal law to the stockholders of
Company and it shall not be a breach of this Agreement for Company's board
of directors to do so.
5.7 FURTHER ASSURANCES. Subject to the terms and conditions in this
Agreement, each of the parties hereto agrees to use its best efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper, or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
by this Agreement. In case at any time after the Effective Time any
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further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each party to this
Agreement shall take all necessary action. In addition, each party agrees
to notify the other by telephone within forty-eight (48) hours of receipt
of any inquiry with respect to a proposed merger, consolidation, asset
acquisition, tender offer, or other takeover transaction involving Company
and another person or receipt of a request for information from the OTS,
FDIC, the United States Department of Justice, or any other governmental
authority with respect to a proposed acquisition of Company by another
party.
5.8 EMPLOYMENT AGREEMENTS. On and after the Effective Time, Acquiror
and Acquiror's Bank agree to honor and be bound by all employment
agreements with Company's or Company's Subsidiaries' senior officers which
are contained in the Company Disclosure Statement. Prior to March 25,
1997, Company shall cause Bank to give each senior officer the notice
required under Section 2, TERM, of each employment agreement that, subject
to the consummation of the Merger, the term of the employment agreement
will not be extended for any additional period.
5.9 TREATMENT OF ESOP.
(a) ESOP AMENDMENTS. Prior to the Effective Time, the ESOP may
be amended to provide for (i) full vesting of benefits by
participants; and (ii) elimination of the requirement for a
participant to be employed on the last day of the year to receive an
employer contribution, other annual additions or allocations, in each
case effective as of the Effective Time. Company shall make no other
amendments to the ESOP without the prior written consent of Acquiror
and shall only make additional contributions to the ESOP at levels
consistent with prior practice and applied to the ESOP indebtedness
(the "ESOP DEBT").
(b) WIND-UP OF THE ESOP. Any cash received by the ESOP trustee
in the course of the Merger with respect to unallocated shares of
Company Common Stock shall be applied by the trustee to the repayment
of the ESOP Debt. The balance of the cash, if any, received by the
ESOP trustee in the course of the Merger with respect to unallocated
shares of Company Common Stock shall be allocated to the accounts of
all participants in the ESOP who have accounts remaining under the
ESOP (whether or not the participants are then actively employed) and
beneficiaries in proportion to the account balances of the
participants and beneficiaries as they existed as of the Effective
Time (and, if required, to the accounts of former participants or
their beneficiaries) as investment earnings of the ESOP, except to the
extent that any portion of the balance of the cash received by the
ESOP trustee would be subject to the limitations of Section 415 of the
Code for that year. Prior to the allocation contemplated by the
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preceding sentence, the administrative and other authority previously
exercised with respect to the ESOP by the board of directors of
Company or Company's Subsidiaries shall be exercised solely by a
committee appointed by the board of directors of Company and in place
under the terms of the ESOP at the Effective Time (the "COMMITTEE"),
which authority shall include the authority to appoint and remove
trustees of the ESOP. If the ESOP is required to be maintained for a
transition period after the Effective Time in order to fully allocate
to participants the cash received in the Merger with respect to
unallocated shares of Company Common Stock, Acquiror agrees to cause
the ESOP to be so continued for a period of up to 24 months after the
Effective Time for the benefit of its participants to the extent
permitted by ERISA, the Code, and other applicable laws and
regulations; provided, however, in such event the ESOP shall be
amended, effective as of the Effective Time, to provide that there
shall be no new participants in the plan on or after the Effective
Time. Upon the making of all allocations in this Agreement, the ESOP
shall be terminated and the account balances therein will be
distributed to participants or their beneficiaries, with the right of
tax-free rollover, to the extent permitted by law, to an individual
retirement account or another tax-qualified plan of Acquiror, at the
election of the distributee. As a condition to any distributions,
Acquiror may secure a favorable determination letter for termination
from the IRS relating to that termination and distribution. If a
determination letter is secured, all distributions will be made in
strict compliance therewith. Notwithstanding the foregoing:
(i) Company shall be entitled to file with the IRS an application, at
any time prior to the Effective Time, for an advance determination
letter relating to termination of the ESOP and/or the methodology for
allocating proceeds; and (ii) if at the expiration of the full
transition period for continued maintenance of the ESOP there remain
unallocated proceeds, then Acquiror may take any action it deems
appropriate with respect to the ESOP, including (but not limited to)
terminating the ESOP and making distributions therefrom or merging the
ESOP into another Acquiror tax-qualified plan.
5.10 CONDUCT OF BUSINESS. Acquiror and Company each covenants not to
take any action or fail to take any action which would jeopardize its
ability to consummate the transactions contemplated by this Agreement,
including obtaining all required regulatory approvals for the Merger and
the Bank Consolidation, or which would cause any of its representations and
warranties to become untrue prior to the Effective Time.
5.11 INDEMNIFICATION. Acquiror acknowledges that any and all rights
to indemnification now existing in favor of the directors and officers of
Company and each of Company's Subsidiaries under their respective
certificate of incorporation, charter, articles of incorporation, or bylaws
shall survive the Merger and shall continue with respect to acts or
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omissions occurring before the Effective Time with the same force and
effect as prior to the Effective Time.
5.12 SUBSEQUENT DISCLOSURES. If, subsequent to the date of this
Agreement and prior to the Closing Date, an event occurs that renders
untrue any representation or warranty of Company made in this Agreement (a
"SUBSEQUENT EVENT"), Company shall promptly deliver to Acquiror an amended
or supplemental disclosure which will contain a detailed description of the
Subsequent Event within five (5) business days after Company learns of the
Subsequent Event but in no event later than the third business day prior to
the Closing. The submission of an amended or supplemental disclosure, and
the existence of the Subsequent Event, shall not constitute a default or
breach by Company of any of its representations or warranties under this
Agreement; PROVIDED, HOWEVER, that all matters therein disclosed, together
with all other events, circumstances, and occurrences may be taken into
account by Acquiror in determining whether the condition set forth in
Subsection 6.1(b) (NO ADVERSE CHANGE) has been satisfied; and PROVIDED
FURTHER, that this Section 5.12 is not intended to permit Company to alter
or amend its representations and warranties as made in this Agreement,
including any disclosure contained in the Company Disclosure Statement, and
any amended or supplemental disclosures provided by Company pursuant to
this Section 5.12 shall not cure the inaccuracy of any representation or
warranty as of the date of this Agreement for any purpose under this
Agreement. Unless waived by the other party in writing, party in breach of
a representation or warranty shall use all reasonable efforts to take
remedial or preventative action in order that such representations and
warranties will be true and complete at the Closing.
5.13 WARN ACT. Company agrees that, if requested by Acquiror, it
shall, on behalf of Acquiror and Acquiror's Bank, issue any notice required
under the Worker Adjustment and Retraining Notification Act of 1988 (the
"WARN ACT") or any similarly applicable state or local law, in connection
with Acquiror's intended closing of one or more of the banking offices of
Bank on or after the Effective Time. Each notice shall be given
sufficiently in advance of any time of closing of an office so that neither
Acquiror nor Bank shall be liable under the WARN Act for any penalty or
payment in lieu of notice to any employee or governmental entity. Acquiror
and Company shall cooperate in the preparation and giving of any notice and
no notice shall be given without the approval of Acquiror.
5.14 DISSENTING STOCKHOLDERS' APPRAISAL RIGHTS. Acquiror and
Company, as applicable, will comply with all applicable notification and
other provisions of regulations or statutes relating to Dissenting Shares.
5.15 DATA PROCESSING AND RELATED CONTRACTS. Until the Effective
Time, Company shall advise Acquiror of all anticipated renewals or
extensions of existing data processing service agreements, data processing
software license agreements, and data processing hardware lease agreements
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with independent vendors. Company agrees to cooperate with Acquiror in
negotiating with those vendors the length of any extension or renewal term
of those agreements, which, unless otherwise agreed with Acquiror, shall
not exceed one year from the date of renewal. Company agrees to send to
each vendor, as and when due, such notices of nonrenewal as may be
necessary or appropriate under the terms of the applicable agreements to
prevent those agreements from automatically renewing for a term of more
than one year from the date of renewal, except as otherwise agreed between
Company and Acquiror.
5.16 ENVIRONMENTAL INVESTIGATION. Acquiror shall be permitted to
conduct an environmental assessment of each parcel of Company's Real
Properties and, at Acquiror's option: (i) any other real estate formerly
owned by Company or Company's Subsidiaries; and (ii) acquired by Company's
Subsidiaries in satisfaction of a debt previously contracted. As to each
such property:
(a) PRELIMINARY ENVIRONMENTAL ASSESSMENTS. Acquiror may, at its
expense, engage an environmental consultant acceptable to Company to
conduct a preliminary ("PHASE I") assessment of the property. Company
and Company's Subsidiaries shall provide reasonable assistance,
including site access and a knowledgeable contact person, to the
consultant for purposes of conducting the Phase I assessments.
(b) ENVIRONMENTAL RISKS. If there are any facts or conditions
identified in a Phase I assessment which, in its discretion, Acquiror
believes could potentially pose a current or future risk of a material
adverse effect on the financial condition, net income, business, or
operations of Company and Company's Subsidiaries, taken as a whole,
then Acquiror shall identify that risk to Company, identify the facts
or conditions underlying that risk, and provide Company with a copy of
the Phase I assessment for that property (an "ENVIRONMENTAL RISK").
(c) PHASE II AND III WORK. Acquiror may obtain one or more
estimates of the proposed scope of work and cost of any further
environmental investigation, remediation, or other follow-up work it
reasonably deems necessary or appropriate to assess and, if necessary
or appropriate, remediate an Environmental Risk if remediation would
be required by applicable law or if a failure to do so could result in
a material adverse effect on the financial condition, net income,
business, or operations of Company and Company's Subsidiaries, taken
as a whole ("PHASE II AND III WORK"). Acquiror shall provide copies
of those estimates to Company. Acquiror and Company shall cooperate
in the review, approval, and implementation of all work plans for
Phase II and III Work. All work plans for any Phase II and III Work
shall be mutually satisfactory to Acquiror and Company. Mutually
agreed upon Phase II and III Work shall be undertaken and completed as
quickly as possible and shall be completed prior to the Closing. If
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the expenses of any Phase II and III Work or proposed work plans or
removal or remediation actions would entail a material cost to
complete, Acquiror and Company shall discuss a mutually acceptable
allocation of that expense or modification to this Agreement.
(d) ACQUIROR'S TERMINATION RIGHTS. If Acquiror and Company are
unable to agree upon a course of action to promptly complete any Phase
II and III Work, an acceptable allocation of related expenses, and/or
an acceptable modification to this Agreement, then Acquiror may give
Company notice of the unacceptable Environmental Risk. Company shall
have thirty (30) days following receipt of that notice to cure that
Environmental Risk, if possible, to Acquiror's reasonable
satisfaction. If not so cured within that thirty (30) days, then
Acquiror may terminate this Agreement as provided in
Subsection 7.1(b)(v) (ENVIRONMENTAL RISK).
5.17 TAX RULING. Acquiror shall promptly seek to obtain from the IRS
a private letter ruling providing assurance that neither Acquiror nor
Company will be required to recapture Bank's pre-1988 bad debt reserves
following the Merger and the Bank Consolidation. In lieu of the IRS's
private letter ruling, Acquiror may choose to accept an opinion from tax
counsel or tax accountants to the same effect.
5.18 EMPLOYEE AGREEMENTS. Acquiror and Company shall promptly seek
to obtain from each employee of Company who, as a result of the change of
control of Company in the Merger, would be entitled to any compensation in
excess of the limitations prescribed by Section 280G of the Code (an
"EXCESS PARACHUTE PAYMENT"), a mutually satisfactory amendment to any
employment agreement, severance agreement, stock option agreement,
restricted stock agreement, or other compensation agreement to (i) adjust
the aggregate amount of compensation due; (ii) extend the time period over
which the compensation is payable; (iii) amend other terms and conditions;
or (iv) any combination of these changes; all in order to prevent all
compensation payable under such agreements from being characterized as an
Excess Parachute Payment.
ARTICLE VI - CONDITIONS
6.1 CONDITIONS TO OBLIGATIONS OF ACQUIROR. The obligations of
Acquiror to consummate the transactions provided for by this Agreement are
subject to the satisfaction at or prior to the Closing of each of the
following conditions, any one or more of which may, to the extent waivable,
be waived by Acquiror:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Company contained in this Agreement, as amended or
supplemented pursuant to Section 5.12 (SUBSEQUENT DISCLOSURES), shall
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be true and correct in all material respects when made as of the date
of this Agreement and as made again as of the Closing, except as to
any representation or warranty which specifically relates to an
earlier date; PROVIDED, HOWEVER, that for purposes of satisfying this
condition (but not for purposes of determining whether or not a breach
has occurred), any representation which contains a knowledge
qualification shall be read without that qualification to verify at
Closing whether the representation was true and correct on the date of
this Agreement. Company shall have performed all agreements and
covenants required by this Agreement to be performed by it. At the
Closing there shall be delivered to Acquiror a certificate signed by
the chief executive and chief financial officers of Company to the
foregoing effect.
(b) NO ADVERSE CHANGE. There shall not have occurred any event,
development, or circumstance related to the business, condition
(financial or otherwise), capitalization, or properties of Company or
Company's Subsidiaries that has had or could reasonably be expected to
have a material adverse effect on the financial condition, net income,
business, or operations of Company and Company's Subsidiaries, taken
as a whole, whether or not the event, development, circumstance,
change, or effect is reflected in the Company Disclosure Statement, as
amended or supplemented after the date of this Agreement, other than:
(i) an adverse effect caused solely by a change in laws or regulations
or other factors (including, but not limited to, a special SAIF
premium assessment or a change in general economic conditions or
interest rates, and the "mark to market" implications of those events)
affecting the financial condition, net income, business, or operations
of thrift or banking institutions generally; or (ii) legal,
accounting, and investment bankers' expenses incurred by Company in
connection with Company's negotiation of this Agreement and the
consummation of the Merger.
(c) CONSENTS. All consents, approvals, and waivers from
governmental agencies (including, without limitation, the Federal
Reserve Board, the FDIC, the FIB, and the OTS as required by 12 U.S.C.
<Section> 1467a(e)(1)), necessary to permit the transactions
contemplated by this Agreement shall have been obtained or provided
for, all waiting periods prescribed by applicable law or regulation
shall have expired, and the United States Department of Justice shall
not have taken any adverse action within the period allowed under 12
U.S.C. <Section> 1828(c)(6).
(d) NO LITIGATION. Neither Acquiror nor Company shall be
subject to any order, decree, or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits the consummation of
the Merger.
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(e) CONTINUED IRS STATUS. Acquiror shall have received an
opinion from Crowe Chizek & Co., L.L.P., independent auditors for
Company, in form and substance satisfactory to Acquiror, to the effect
that, immediately prior to the Effective Time, the Bank qualifies as a
"domestic building and loan association" within the meaning of
<Section> 7701(a)(19) of the Code.
(f) OPINION OF COUNSEL. Acquiror shall have received the
opinion of Silver, Freedman & Taff, L.L.P., counsel to Company,
substantially in the form and content set forth in Exhibit C. Any
certificate relied upon by Company's counsel shall also be addressed
to Acquiror.
(g) TAX OPINION. Acquiror shall have received the opinion of
Warner Norcross & Judd LLP, counsel to Acquiror, relating to the tax
consequences of the transactions contemplated under this Agreement,
in form and content reasonably satisfactory to Acquiror.
(h) CERTIFICATE AS TO OUTSTANDING SHARES. Acquiror shall have
received one or more certificates dated as of the Closing date and
signed by the secretary of Company on behalf of Company, and by the
transfer agent for Company Common Stock, certifying (i) the total
number of shares of capital stock of Company issued and outstanding as
of the close of business on the day immediately preceding the Closing;
and (ii) with respect to the secretary's certification, the number of
shares of Company Common Stock, if any, which are issuable on or after
that date, all in such form as Acquiror may reasonably request.
(i) CHANGE OF CONTROL WAIVERS. Acquiror shall have received
evidence of the waiver of any material rights and the waiver of the
loss of any material rights which may be triggered by the change of
control of Company upon consummation of the Merger under any
agreements, contracts, mortgages, deeds of trust, leases, commitments,
indentures, notes, or other instruments described in the Company
Disclosure Statement, the breach of which would cause a material
adverse effect on the financial condition, net income, business, or
operations of Company and Company's Subsidiaries, taken as a whole,
all in form and substance reasonably satisfactory to Acquiror.
(j) ENVIRONMENTAL RISK. All investigation and remediation with
respect to any Environmental Risk identified during its Phase I
assessments and all related Phase II and III Work shall have been
substantially completed to Acquiror's reasonable satisfaction, all as
provided in Section 5.16 (ENVIRONMENTAL INVESTIGATION).
(k) EXECUTIVE EMPLOYMENT AND COMPENSATION. Acquiror shall have
received definitive statements substantially in the form contained in
Exhibit E. Each definitive statement shall be separately signed and
acknowledged as being true, correct, and complete by each person.
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(l) TAX RULING. Acquiror shall have received from the IRS a
private letter ruling, or a satisfactory opinion from tax counsel or
tax accountants, regarding Bank's pre-1988 bad debt reserves as
described in Section 5.17 (TAX RULING).
(m) EMPLOYEE AGREEMENTS. Acquiror and Company shall have
received from Company's employees all required amendments to
employment agreements, severance agreements, stock option agreements,
restricted stock agreements, or other compensation agreements with
respect to Excess Parachute Payments as described in Section 5.18
(EMPLOYEE AGREEMENTS).
(n) OTHER CLOSING TRANSACTION DOCUMENTS. Company shall have
delivered to Acquiror at the Closing such other certificates,
instruments, and documents as may be reasonably requested by Acquiror
prior to the Closing.
6.2 CONDITIONS TO OBLIGATIONS OF COMPANY. The obligations of Company
to consummate the transactions provided for by this Agreement are subject
to the satisfaction at or prior to the Closing of each of the following
conditions, any one or more of which may be waived, to the extent waivable:
(a) STOCKHOLDER APPROVAL. The affirmative vote of holders of at
least a majority of the outstanding shares of Company's Common Stock
entitled to vote on the adoption of this Agreement shall have been
duly received at the Stockholders' Meeting.
(b) CONSENTS. All consents, approvals, and waivers from third
parties and governmental agencies necessary to permit the transactions
contemplated by this Agreement shall have been obtained or provided
for, and all waiting periods shall have expired, as provided in
Subsection 6.1(c) (CONSENTS).
(c) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Acquiror contained in this Agreement shall be true and
correct in all material respects when made as of the date of this
Agreement and as made again as of the Closing, except as to any
representation or warranty which specifically relates to an earlier
date. Acquiror shall have performed all agreements and covenants
required by this Agreement to be performed by it. At the Closing
there shall be delivered to Company a certificate signed by the chief
executive and chief financial officers of Acquiror to the foregoing
effect.
(d) NO LITIGATION. Neither Acquiror nor Company shall be
subject to any order, decree, or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits the consummation of
the Merger.
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(e) OPINION OF COUNSEL. Company shall have received the opinion
of Warner Norcross & Judd LLP, counsel to Acquiror, substantially in
the form and content set forth in Exhibit D.
(f) OTHER CLOSING TRANSACTION DOCUMENTS. Acquiror shall have
delivered to Company at the Closing such other certificates,
instruments, and documents as may be reasonably requested by Company
prior to the Closing.
ARTICLE VII - TERMINATION
7.1 TERMINATION. This Agreement and the Merger may only be
terminated and the transactions contemplated by this Agreement may be
abandoned at any time prior to the Closing (notwithstanding that this
Agreement has been adopted by Company's stockholders):
(a) MUTUAL ACTION. By agreement authorized by the boards of
directors of Acquiror and Company, or duly authorized committees of
the boards; or
(b) ACQUIROR'S TERMINATION RIGHTS. By the board of directors,
or a duly authorized committee of the board, of Acquiror if:
(i) FAILURE OF CONDITIONS. At any time after the Closing
could otherwise be called, there has been a failure by Company to
satisfy its conditions precedent set forth in Subsections 6.1 (a)
(REPRESENTATIONS AND WARRANTIES), (b) (NO ADVERSE CHANGE), (e)
(CONTINUED IRS STATUS), (f) (OPINION OF COUNSEL), (g) (TAX
OPINION), (h) (CERTIFICATE AS TO OUTSTANDING SHARES), (i) (CHANGE
OF CONTROL WAIVERS), (j) (ENVIRONMENTAL RISK), (k) (EXECUTIVE
EMPLOYMENT AND COMPENSATION), (m) (EMPLOYEE AGREEMENTS), or (n)
(OTHER CLOSING TRANSACTION DOCUMENTS) which notice has been given
in writing by Acquiror and which has not been cured within thirty
(30) business days of receipt of notice, OR
(ii) UPSET DATE. The Effective Time has not occurred prior
to September 30, 1997, without material fault on the part of
Acquiror; OR
(iii) ACQUISITION PROPOSALS. The board of directors of
Company shall have withdrawn, or modified, or changed in a manner
adverse to Acquiror, its approval or recommendation of this
Agreement or the Merger, or shall have recommended an Acquisition
Proposal or offer, or shall have executed an agreement in
principle (or similar agreement), or definitive agreement
providing for a tender offer or exchange offer for any shares of
capital stock of Company, or a merger, consolidation, or other
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business combination of Company or Bank or a sale of more than 25
percent of the assets of Company or Bank with or to a person or
entity other than Acquiror or its affiliates (or the board of
directors of Company resolves to do any of the foregoing); or
(iv) ACQUIRING PERSONS. It shall have been publicly
disclosed or Acquiror shall have learned that any person, entity,
or "group" (as that term is defined in Section 13(d)(3) of the
Exchange Act) (an "ACQUIRING PERSON"), other than Acquiror or its
affiliates or any group of which any of them is a member, shall
have acquired beneficial ownership (determined pursuant to Rule
13d-3 promulgated under the 1934 Act) of more than 19.9 percent
of any class or series of capital stock of Company through the
acquisition of stock, the formation of a group or otherwise, or
shall have been granted an option, right, or warrant, conditional
or otherwise, to acquire beneficial ownership of more than 19.9
percent of any class or series of capital stock of Company; or
(v) ENVIRONMENTAL RISKS. If Acquiror has given Company
notice of an unacceptable Environmental Risk pursuant to
Section 5.16 (ENVIRONMENTAL INVESTIGATION), and it is not cured
within the thirty- (30) day period, or any extension thereof, as
provided in Subsection 5.16(d) (ACQUIROR'S TERMINATION RIGHTS).
(c) COMPANY'S TERMINATION RIGHTS. By the board of directors, or
a duly authorized committee of the board, of Company if:
(i) FAILURE OF CONDITIONS. At any time after the Closing
could otherwise be called, there has been a failure by Acquiror
to satisfy its conditions precedent set forth in Subsection 6.2
(c) (REPRESENTATIONS AND WARRANTIES), (e) (OPINION OF COUNSEL),
or (f) (OTHER CLOSING TRANSACTION DOCUMENTS) of which notice has
been given in writing by Company and which has not been cured
within thirty (30) business days of receipt of notice;
(ii) UPSET DATE. The Effective Time has not occurred prior
to September 30, 1997, without material fault on the part of
Company; or
(iii) DELAYED REGULATORY APPROVAL. On or after June 30,
1997, the Effective Time has not occurred and the Federal Reserve
Board has not yet approved the Merger.
(d) RECIPROCAL TERMINATION RIGHTS. By the board of directors,
or a duly authorized committee of the board, of either Acquiror or the
Company at any time after the date that (i) holders of a majority of
the shares of Company Common Stock present, in person or by proxy, at
the Stockholder Meeting vote against adoption of this Agreement or
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expressly abstain from voting; (ii) any governmental consent or
approval specified in Subsection 6.1(c) (CONSENTS) is denied by final
order; or (iii) either Acquiror or Company is subject to any order,
decree, or injunction of a court or agency of competent jurisdiction
which permanently enjoins or prohibits the consummation of the Merger.
7.2 EFFECT OF TERMINATION.
(a) NO RELEASE OF LIABILITY. No termination of this Agreement
under this Article VII for any reason or in any manner shall release,
or be construed as so releasing, either party from its obligations
under Subsections 5.1 (b) (CONFIDENTIALITY), (c) (NO PRESUMPTION), (d)
(ACQUIROR'S NONPUBLIC INFORMATION), and (e) (PROHIBIT INSIDER TRADING)
and Section 8.12 (EXPENSES) or any party hereto from any liability to
any other party under this Section 7.2.
(b) TERMINATION NOTICE. In the event of the termination of this
Agreement as provided in Section 7.1 (TERMINATION), notice shall
immediately be given to the other party or parties specifying the
provision of this Agreement pursuant to which termination is made.
After the expiration of any applicable cure period without the grounds
for termination being cured, this Agreement shall immediately become
null and void, and there shall be no liability on the part of Acquiror
or Company except (i) for fraud or for willful and material breach of
this Agreement and (ii) as set forth in this Section 7.2 and Section
8.12 (EXPENSES).
(c) TERMINATION FEE. If (i) the board of directors of Acquiror
shall terminate this Agreement pursuant to Subsection 7.1(b)(iii)
(ACQUISITION PROPOSALS), or (ii) the board of directors of Acquiror
shall terminate this Agreement pursuant to Subsection 7.1(b)(iv)
(ACQUIRING PERSONS) and within one year of termination, the Acquiring
Person shall acquire or beneficially own a majority of the then
outstanding shares of Company Common Stock or shall have obtained
representation of two or more directors on Company's board of
directors or shall enter into a definitive agreement with Company with
respect to an Acquisition Proposal or similar business combination,
then in any case described in clauses (i) or (ii) of this Subsection
(each referred to as an "ACQUIROR TRIGGER EVENT"), Company shall pay
to Acquiror (not later than two business days after termination of
this Agreement) an amount equal to $2,000,000.
(d) COMPANY BREACH. If the board of directors of Acquiror shall
terminate this Agreement pursuant to Subsection 7.1(b)(i) (FAILURE OF
CONDITIONS) due to (i) a willful and material breach of any of the
representations and warranties of Company set forth in this Agreement;
or (ii) a willful and material breach of any material obligation,
agreement, or covenant contained in this Agreement by Company (also
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"ACQUIROR TRIGGERING EVENTS"), Company shall pay to Acquiror (not
later than two (2) business days after termination of this Agreement)
an amount equal to $750,000.
(e) ACQUIROR'S EXPENSES. In addition to any other amount due,
upon the termination of this Agreement due to the occurrence of a
Trigger Event, Company agrees that it shall promptly assume and pay,
or reimburse Acquiror for, all reasonable fees and expenses incurred,
or to be incurred by Acquiror and Acquiror's Bank (including the fees
and expenses of legal counsel, accountants, financial advisors, other
consultants, and financial printers) in connection with this
Agreement, the Merger, and the other transactions contemplated by this
Agreement, in an amount not to exceed $250,000 in the aggregate.
(f) ACQUIROR BREACH. If the board of directors of Company shall
terminate this Agreement pursuant to Subsection 7.1(c)(i) (FAILURE OF
CONDITIONS) due to (i) a willful and material breach of any of the
representations and warranties of Acquiror set forth in this
Agreement; or (ii) a willful and material breach of any material
obligation, agreement, or covenant contained in this Agreement by
Acquiror (each referred to as a "COMPANY TRIGGERING EVENT"), then in
any such event, Acquiror shall pay to Company (not later than two (2)
business days after termination of this Agreement) an amount equal to
$750,000.
(g) COMPANY'S EXPENSES. In addition to any other amount due,
upon the termination of this Agreement due to the occurrence of a
Company Trigger Event or Company's termination of this Agreement
pursuant to Subsections 7.1(c)(i) (FAILURE OF CONDITIONS), 7.1(c)(iii)
(DELAYED REGULATORY APPROVAL) or 7.1(d)(ii) (RECIPROCAL TERMINATION
RIGHTS), Acquiror agrees that it shall promptly assume and pay, or
reimburse Company for, all reasonable fees and expenses incurred, or
to be incurred by Company and Company's Subsidiaries (including the
fees and expenses of legal counsel, accountants, financial advisors,
other consultants, and financial printers) in connection with this
Agreement, the Merger, and the other transactions contemplated by this
Agreement, in an amount not to exceed $250,000 in the aggregate.
ARTICLE VIII - GENERAL
Subject to the terms and conditions of this Agreement, Acquiror and
Company further agree as follows:
8.1 NOTICES. All notices, requests, demands, and other communications
under this Agreement shall be in writing and shall be deemed to have been
duly given if delivered or sent and received by a fax transmission (if
receipt by the intended recipient is confirmed by telephone and if hard
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copy is delivered by overnight delivery service the next day), a hand
delivery, or a nationwide overnight delivery service (all fees prepaid) to
the following addresses:
If to Acquiror, addressed to: With a copy to:
Shoreline Financial Corporation Gordon R. Lewis, Esq.
Attention: Mr. Dan L. Smith Warner Norcross & Judd LLP
823 Riverview Dr. 900 Old Kent Building
Post Office Box 1248 111 Lyon Street, N.W.
Benton Harbor, MI 49023-1248 Grand Rapids, Michigan 49503-2487
If to Company, addressed to: With a copy to:
SJS Bancorp, Inc. James S. Fleischer, P.C.
Attention: Mr. Thomas G. Watson Silver, Freedman & Taff, L.L.P.
301 State Street Seventh Floor East
St. Joseph, MI 49085-1294 1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
or to such other place and with such other copies as either party may
designate as to itself by written notice to the others.
8.2 WAIVER. Any of the terms or conditions of this Agreement may be
waived in writing at any time by action taken by the board of directors of
a party, a duly authorized committee thereof, or a duly authorized officer
of such party. The failure of any party at any time or times to require
performance of any provision of this Agreement shall in no manner affect
such party's right at a later time to enforce the same provision. No
waiver by any party of any condition, or of the breach of any term,
covenant, representation, or warranty contained in this Agreement, whether
by conduct or otherwise, in any one or more instances shall be deemed to be
or construed as a further or continuing waiver of any such condition or
breach, or as a waiver of any other condition, or of the breach of any
other term, covenant, representation, or warranty.
8.3 CHOICE OF LAW. This Agreement shall be governed by, construed,
interpreted, and the rights of the parties determined in accordance with
the applicable laws of the United States and the State of Michigan; matters
of corporate law applicable to Company shall be governed by, construed, and
interpreted according to the DGCL and related laws of the State of
Delaware.
8.4 SPECIFIC ENFORCEMENT. The parties each agree that, consistent
with the terms and conditions of this Agreement, in the event of a breach
by a party to this Agreement, money damages will be inadequate and not
susceptible of computation because of the unique nature of Company,
Company's Subsidiaries, and the Merger. Therefore, the parties each agree
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that a federal or state court of competent jurisdiction shall have
authority, subject to the rules of law and equity, to specifically enforce
the provisions of this Agreement by injunctive order or such other
equitable means as may be determined in the court's discretion. In no
event shall a party be entitled to a recovery under this Section for
damages or expenses recovered under another section of this Agreement.
8.5 JURISDICTION; VENUE; JURY. Acquiror and Company each agree to
the jurisdiction and venue of any state court located in Berrien County,
Michigan. Acquiror and Company each hereby waive their right to a trial by
jury.
8.6 ENTIRE AGREEMENT. The Company Disclosure Statement, the Acquiror
Disclosure Statement, the updates to such disclosure statements, the
exhibits, and the agreements expressly identified in this Agreement are an
integral part of this Agreement. This Agreement contains the entire
agreement between the parties with respect to the Merger. This Agreement
supersedes all prior written and oral arrangements, agreements, or
understandings with respect to its subject matter. The parties have not
relied upon any written or oral statements or representations other than as
stated in this Agreement, the Company Disclosure Statement, the Acquiror
Disclosure Statement, or the updates to such disclosure statements. The
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon Acquiror and Company and their respective successors. Nothing
in this Agreement, express or implied, is intended to confer upon any
person other than these parties any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
8.7 HEADINGS, ETC. The article headings and section headings
contained in this Agreement are inserted for convenience only and shall not
affect in any way the meaning or interpretation of this Agreement.
8.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, which taken together shall constitute one and the same
instrument. Executed counterparts of this Agreement shall be deemed to
have been fully delivered and shall become legally binding if and when
executed signature pages are received by fax from a party. If so delivered
by fax, the parties agree to promptly send original, manually executed
copies by nationwide overnight delivery service.
8.9 AMENDMENT. Subject to applicable law, this Agreement may be
amended, modified, or supplemented by, and only by, written agreement of
Acquiror and Company, or by the respective officers thereunto duly
authorized, at any time prior to the Effective Time.
8.10 NO ASSIGNMENT. Neither party may assign any of its rights or
obligations under this Agreement to any other person.
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8.11 SEVERABILITY. If any term, provision, covenant, or restriction
contained in this Agreement is held by a final and unappealable order of a
court of competent jurisdiction to be invalid, void, or unenforceable, then
the remainder of the terms, provisions, covenants, and restrictions
contained in this Agreement shall remain in full force and effect, and
shall in no way be affected, impaired, or invalidated unless the effect
would be to cause this Agreement to not achieve its essential purposes.
8.12 EXPENSES. Except as otherwise provided in Section 7.2 (EFFECT
OF TERMINATION), the costs and expenses of Acquiror and Company shall be
allocated as follows:
(a) ACQUIROR'S EXPENSES. Acquiror shall bear all fees and
expenses of its counsel, accountants, and investment bankers, and all
other costs and expenses incurred by it in the review and negotiation
of this Agreement and the Bank Consolidation Agreement, the
investigation of Company, the preparation and prosecution of its
application for regulatory approval, the Phase I assessments, and all
costs and expenses of any appeals therefrom. In addition, all filing
and application fees to be paid by either party or its subsidiaries to
governmental or regulatory authorities in connection with the
transactions contemplated by this Agreement shall be borne by
Acquiror.
(b) COMPANY'S EXPENSES. Company or Company's Subsidiaries shall
bear all fees and expenses of its counsel, accountants, and investment
bankers, the costs of printing and mailing the Proxy Statement for use
at the Stockholders' Meeting, and all other costs and expenses
incurred by such persons or firms in the preparation of this
Agreement, the calling, noticing, and holding of the Stockholders'
Meeting and the furnishing of information or other cooperation to
Acquiror in connection with the preparation of regulatory
applications.
8.13 PUBLICITY. Until the Effective Time, all announcements, press
releases, and other communications with stockholders or employees of
Company shall be made only after consultation by the parties as to the
content and timing of such communications. Until the Effective Time, any
such announcements or communications by Company or Acquiror with third
parties or representatives of the press or news media shall be made only
with the prior approval of the other party hereto, except as and to the
extent reasonably required for a party to comply with disclosure
obligations imposed upon that party under applicable securities laws and
related rules and regulations, or otherwise required by law.
8.14 SURVIVAL. The representations and warranties of the parties
hereto shall expire at the Effective Time and shall not survive the
consummation of the Merger or the Bank Consolidation. All covenants and
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agreements contemplated to be performed prior to the Effective Time shall
expire at the Effective Time and shall not survive the consummation of the
Merger or the Bank Consolidation, and all covenants and agreements of
Acquiror contemplated to be performed, partially or in full, after the
Effective Time, shall survive the Effective Time and the consummation of
the transactions contemplated by this Agreement.
8.15 CALCULATION OF DATES AND DEADLINES. Unless otherwise
specified, any period of time to be determined under this Agreement shall
be deemed to commence at 12:01 a.m. on the first full day after the
specified starting date, event, or occurrence. Any deadline, due date,
expiration date, or period-end to be calculated under this Agreement shall
be deemed to end at 5 p.m. on the last day of the specified period. The
time of day shall be determined with reference to the then current local
time in Benton Harbor, Michigan.
[BALANCE OF THIS PAGE INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, Acquiror and MergerSub have each caused this
Agreement and Plan of Merger to be executed in this counterpart by their
respective, duly authorized officers as of the date first above written.
SHORELINE FINANCIAL CORPORATION
By: /S/ DAN L. SMITH
Dan L. Smith, Chairman of the Board,
President, and Chief Executive Officer
SJS ACQUISITION CORPORATION
By: /S/ DAN L. SMITH
Dan L. Smith, President
[BALANCE OF THIS PAGE INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, Company has caused this Agreement and Plan of
Merger to be executed in this counterpart by its duly authorized officer as
of the date first above written.
SJS BANCORP, INC.
By: /S/ THOMAS G. WATSON
Thomas G. Watson, President
[BALANCE OF THIS PAGE INTENTIONALLY BLANK]
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EXHIBIT A
COMPANY'S DISCLOSURE STATEMENT
A-1
<PAGE>
EXHIBIT B
ACQUIROR'S DISCLOSURE STATEMENT
This is the Acquiror Disclosure Statement described in Article IV
of this Agreement. There are no exceptions to Acquiror's representations
or warranties set forth in this Agreement.
B-1
<PAGE>
EXHIBIT C
[SILVER, FREEDMAN & TAFF, L.L.P. LETTERHEAD]
[Date]
Shoreline Financial Corporation
823 Riverview Dr.
PO Box 1248
Benton Harbor, Michigan 49023-1248
Gentlemen:
We are counsel to SJS Bancorp, Inc. ("Company"), in connection
with an Agreement and Plan of Merger dated as of November 6, 1996 (the
"Agreement"), between the Company, Shoreline Financial Corporation
("Shoreline"), and SJS Acquisition Corporation, a Michigan corporation
("MergerSub"). This opinion is delivered to you pursuant to Section 6.1(f)
of the Agreement.
For purposes of this opinion, we have examined the Agreement; the
Company Disclosure Statement, as updated; the certificate of incorporation
and bylaws of Company; the charter and bylaws of Bank; resolutions relating
to the Agreement adopted by Company's board of directors; and such other
documents as we have deemed necessary under the circumstances.
In making our examination, we have assumed the genuineness of
signatures on original documents and the conformity to original documents
of all copies submitted to us as facsimile, photostatic or conformed
copies. As to various facts material to our opinion, we have relied upon
statements or certificates of public officials and officers or
representatives of Company and others, true copies of which are attached.
We also reviewed such matters of law as we deemed necessary under the
circumstances.
All terms appearing, but not otherwise defined, in this opinion
shall have the various meanings defined in the Agreement. As used in this
opinion, "knowledge" means the actual knowledge of the lawyer signing this
opinion and the actual knowledge of any lawyer who is a partner or employee
of our firm who has had active involvement in negotiating the Agreement,
preparing the Company Disclosure Statement, preparing documents relating to
the Merger, or preparing this opinion.
Based upon and subject to the foregoing, it is our opinion that:
C-1
<PAGE>
Shoreline Financial Corporation
[Date]
Page 2
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1.1 ORGANIZATION, STANDING, AND POWER.
(a) COMPANY'S ORGANIZATION. Company is duly organized, validly
existing, and in good standing as a corporation under the laws of the
State of Delaware and is authorized by the OTS to be a savings and
loan holding company. Company has all requisite corporate power and
authority to own, lease, and operate its properties and assets and to
carry on its business as presently conducted. Neither the scope of
the business of Company nor the location of any of its properties
requires that it be licensed to do business in any jurisdiction other
than the State of Michigan.
(b) BANK'S ORGANIZATION. Bank is duly organized and validly
existing as a federally chartered stock savings bank under HOLA and is
authorized by the OTS to conduct a savings and loan business. Bank
has all requisite corporate power and authority to own, lease, and
operate its properties and assets and to carry on its business as
presently conducted. Neither the scope of the business of Bank nor
the location of any of its properties requires that it be licensed to
do business in any jurisdiction other than the State of Michigan.
(c) NON-BANK SUBSIDIARY'S ORGANIZATION. Non-Bank Subsidiary is
duly organized, validly existing, and in good standing as a
corporation under the laws of the State of Michigan. Non-Bank
Subsidiary is duly qualified or licensed as a foreign corporation in
each other state or jurisdiction in which the ownership of property or
the conduct of business requires licensing or qualification, except
where the failure to be so qualified or licensed would not have a
material adverse effect on the financial condition, net income,
business, or operations of Company and Company's Subsidiaries, taken
as a whole. Non-Bank Subsidiary has all requisite corporate power and
authority to own, lease, and operate its respective properties and
assets and to carry on its business as presently conducted. Non-Bank
Subsidiary is engaged only in those activities which are permitted by
the OTS.
1.2 CAPITALIZATION.
(a) COMPANY'S CAPITAL STOCK. The authorized capital stock of
Company consists of 4,500,000 shares of Company Common Stock, par
value $0.01 per share, of which [917,622] shares are issued and
outstanding as of the date of this opinion, and 2,000,000 shares of
preferred stock, par value $0.01 per share, none of which is
C-2
<PAGE>
Shoreline Financial Corporation
[Date]
Page 3
- -------------------------------
outstanding. All of the outstanding shares of Company Common Stock
are validly issued, fully paid, and nonassessable. Except for stock
options covering [79,509] shares of Common Stock granted pursuant to
the Incentive Plan (the "STOCK OPTIONS"), there are no outstanding
options, warrants, or other rights in or with respect to the unissued
shares of Company's capital stock nor any securities convertible into
the stock. Except as described in this Section, Company is not
obligated to issue any additional shares of Company's capital stock or
any additional options, warrants, or other rights in or with respect
to the unissued shares of Company's capital stock or any other
securities convertible into Company's capital stock.
(b) ISSUANCE OF SHARES. After the date of this opinion, the
number of issued and outstanding shares of Company Common Stock is not
subject to change before the Effective Time.
(c) VOTING RIGHTS. Other than the shares of Company Common
Stock issued and outstanding as of the record date for the Stockholder
meeting, neither Company nor any of Company's Subsidiaries have
outstanding any security or issue of securities:
(i) The holder or holders of which have the right to vote
on the adoption of the Agreement or approval of the Merger; or
(ii) Which entitle the holder or holders to consent to, or
withhold consent on, the Merger or the Agreement.
(d) BANK CAPITAL STOCK. The authorized capital stock of Bank
consists of 4,500,000 shares of common stock, $0.01 par value each, of
which 917,622 shares are issued and outstanding, and 2,000,000 shares
of serial preferred stock, none of which is outstanding. All of the
outstanding shares of Bank's common stock are validly issued, fully
paid, and nonassessable and are owned by Company, free and clear of
all liens and encumbrances. There are no outstanding options,
warrants, or other rights in or with respect to the unissued shares of
Bank's common stock nor any securities convertible into the stock and
Bank is not obligated to issue any additional shares of its common
stock or any additional options, warrants, or other rights in or with
respect to the unissued shares of Bank's common stock or any other
securities convertible into Bank's common stock.
(e) NON-BANK SUBSIDIARY CAPITAL STOCK. All of the outstanding
shares of common stock of Non-Bank Subsidiary are validly issued,
C-3
<PAGE>
Shoreline Financial Corporation
[Date]
Page 4
- -------------------------------
fully paid, and nonassessable and are owned by Bank, free and clear of
all liens and encumbrances. There are no outstanding options,
warrants, or other rights in or with respect to the unissued shares of
Non-Bank Subsidiary's common stock nor any securities convertible into
that stock. Non-Bank Subsidiary is not obligated to issue any
additional shares of its common stock or any additional options,
warrants, or other rights in or with respect to the unissued shares of
its common stock or any other securities convertible into Non-Bank
Subsidiary's common stock.
1.3 AUTHORITY OF COMPANY. The execution, delivery, and performance
by Company of the Agreement and the consummation of the transactions
contemplated by the Agreement have been duly and validly authorized by all
necessary corporate action on the part of Company. The Agreement is a
valid and binding obligation of Company, enforceable in accordance with its
terms, except insofar as the enforceability may be limited by applicable
bankruptcy, insolvency, receivership, and other laws affecting the rights
of creditors generally.
1.4 NO VIOLATION. Neither the execution, delivery, and performance
by Company of the Agreement, the consummation of the transactions
contemplated in the Agreement, nor compliance by Company with any of the
provisions of the Agreement, will:
(a) CORPORATE DOCUMENTS. Conflict with or result in a breach of
any provision of its certificate of incorporation or bylaws;
(b) MATERIAL CONTRACTS. Constitute a breach of or result in a
default, or give rise to any rights of termination, cancellation, or
acceleration, or any right to acquire any securities (other than the
options currently outstanding under the Incentive Plan and shares of
Company Common Stock currently outstanding but subject to restrictions
under the Recognition Plan) or assets, under any of the terms,
conditions, or provisions of any note, bond, mortgage, indenture,
franchise, license, permit, agreement, or other instrument or
obligation, known to us, to which Company or Company's Subsidiaries
are a party, or by which Company or Company's Subsidiaries or any of
their respective properties or assets are bound, if in any of those
circumstances the event could have consequences materially adverse to
the financial condition, net income, business, or operations of
Company and Company's Subsidiaries, taken as a whole, or impair
Company's ability to perform its obligations under the Agreement; or
C-4
<PAGE>
Shoreline Financial Corporation
[Date]
Page 5
- -------------------------------
(c) ORDERS AND INJUNCTIONS. Violate any order, writ,
injunction, decree, statute, rule, or regulation, known to us,
applicable to Company or Company's Subsidiaries or any of their
respective properties or assets.
1.5 NO CONSENT. No consent of, approval of, notice to, or filing
with any governmental authority having jurisdiction over any aspect of the
business or assets of Company or Company's Subsidiaries, and no consent of,
approval of, or notice to or filing with any other person is required in
connection with the execution, delivery, and performance by Company of the
Agreement or the consummation by Company of the transactions contemplated
by the Agreement, except as has already been obtained.
1.6 LITIGATION. To our knowledge:
(a) MATERIAL CLAIMS. Except as disclosed in the Company
Disclosure Statement, as updated, there is no private or governmental
suit, claim, action, or proceeding (arbitral or otherwise) pending or
threatened against Company, any of Company's Subsidiaries, or any
person who may be entitled to indemnification by Company or Company's
Subsidiaries involving a monetary claim in excess of $10,000 or a
demand for equitable relief, or against any of their directors or
officers relating to the performance of their duties in those
capacities.
(b) NO INJUNCTIONS. There are no material judgments, decrees,
stipulations, or orders against Company or Company's Subsidiaries
enjoining them or any of their directors or officers in respect of, or
the effect of which is to prohibit, any business practice or the
acquisition of any property or the conduct of business in any area.
(c) ACTIONS PREVIOUSLY DISCLOSED. Except as described in the
Company Disclosure Statement, as updated, there is no litigation to
which Company, Bank, or any of their directors or officers are a party
and which names Company, any of Company's Subsidiaries, or any person
who may be entitled to indemnification by Company or Company's
Subsidiaries as a defendant or cross-defendant and prays for damages
or any other remedy or remedies that, if sustained, could have
consequences materially adverse to the financial condition, net
income, business, or operations of Company and Company's Subsidiaries,
taken as a whole, or impair the ability of Company to perform its
obligations under the Agreement or the ability of Bank to perform its
obligations under the Bank Consolidation Agreement.
C-5
<PAGE>
Shoreline Financial Corporation
[Date]
Page 6
- -------------------------------
This opinion has been furnished to you in accordance with the
Agreement and may not be relied upon by any other person or for any other
purpose. This opinion is based on laws, rules, and regulations in effect
as of the date of this opinion. As and to the extent that Michigan law
applies, we have relied, with your permission, upon counsel licensed to
practice law in Michigan. We express no opinion as to laws, rules, and
regulations other than these. This opinion is limited to those matters
expressly stated and no opinion should be inferred or implied beyond such
matters.
Very truly yours,
SILVER, FREEDMAN & TAFF, L.L.P.
By ____________________________________
, a Partner
C-6
<PAGE>
EXHIBIT D
[WARNER NORCROSS & JUDD LLP LETTERHEAD]
[Date]
SJS Bancorp, Inc.
301 State Street
St. Joseph, MI 49085-1294
Gentlemen:
We are general counsel to Shoreline Financial Corporation
("Acquiror") and SJS Acquisition Corporation, a Michigan corporation
("MergerSub"), and have served as their counsel in connection with an
Agreement and Plan of Merger dated as of November 6, 1996 (the
"Agreement"), between SJS Bancorp, Inc. ("Company"), Acquiror, and
MergerSub. This opinion is delivered to you pursuant to Section 6.2(e) of
the Agreement.
For purposes of rendering this opinion, we have examined the
Agreement; the Acquiror Disclosure Statement, as updated; the articles of
incorporation and bylaws of Acquiror and MergerSub, respectively;
resolutions relating to the Agreement adopted by the boards of directors
and board committees of Acquiror and MergerSub, and such other documents as
we have deemed necessary under the circumstances.
In making our examination, we have assumed the genuineness of
signatures on original documents and the conformity to original documents
of all copies submitted to us as facsimile, photostatic or conformed
copies. As to various facts material to our opinion, we have relied upon
statements or certificates of public officials and officers or
representatives of Acquiror and MergerSub, true copies of which are
attached. We also reviewed such matters of law as we deemed necessary
under the circumstances.
All terms appearing, but not otherwise defined, in this opinion
shall have the various meanings defined in the Agreement. As used in this
opinion, "knowledge" means the actual knowledge of the lawyer signing this
opinion and the actual knowledge of any lawyer who is a partner or employee
of our firm who has had active involvement in negotiating the Agreement,
preparing the Acquiror Disclosure Statement, preparing documents relating
to the Merger, or preparing this opinion.
Based upon and subject to the foregoing, we are of the opinion
that:
D-1
<PAGE>
SJS Bancorp, Inc.
[Date]
Page 2
- -------------------------------
1.1 ORGANIZATION AND QUALIFICATION. Acquiror and MergerSub are
corporations duly organized, validly existing, and in good standing under
the laws of the State of Michigan. Acquiror's Bank is a Michigan banking
corporation duly organized, validly existing, and in good standing under
the Banking Code.
1.2 AUTHORITY RELATIVE TO THE AGREEMENT. Acquiror and MergerSub each
have full corporate power and authority to execute, deliver, and perform
the Agreement and to consummate the transaction contemplated by the
Agreement. The execution, delivery, and performance of the Agreement and
the consummation of the transactions contemplated by the Agreement have
been duly authorized and approved by the boards of directors of Acquiror
and MergerSub. No other corporate proceedings on the part of Acquiror or
MergerSub are necessary to authorize the Agreement or to consummate the
transactions contemplated by the Agreement. The Agreement has been duly
and validly executed and delivered by Acquiror and MergerSub and
constitutes the valid and binding agreement of Acquiror and MergerSub,
enforceable against either of them in accordance with its terms, except
insofar as the enforceability may be limited by applicable bankruptcy,
insolvency, receivership, and other laws affecting the rights of creditors
generally.
1.3 NO CONFLICT OR VIOLATION. Neither the execution nor delivery of
the Agreement nor the consummation by Acquiror and MergerSub of the
transactions contemplated by the Agreement nor the compliance with and
fulfillment of the terms and provisions of the Agreement by Acquiror and
MergerSub will conflict with, or result in a breach of, any term,
condition, or provision of, or constitute a default under:
(a) CORPORATE DOCUMENTS. The articles of incorporation or
bylaws of Acquiror or MergerSub, respectively;
(b) MATERIAL AGREEMENTS. Any material agreement or instrument,
known to us, to which Acquiror or Acquiror's Bank is a party or by
which either of them is bound; or
(c) ORDERS; LIENS. Any material order, judgment, or decree,
known to us, to which Acquiror or Acquiror's Bank is subject, or
result in the creation of any material lien, charge, or encumbrance on
any of their respective properties.
1.4 LITIGATION. To our knowledge, there is no private or
governmental suit, claim, action, or proceeding pending or threatened, or
D-2
<PAGE>
SJS Bancorp, Inc.
[Date]
Page 3
- -------------------------------
which reasonably should be expected to be commenced, against Acquiror, its
subsidiaries or against any of their directors or officers that would
impair the ability of Acquiror to perform its obligations under the
Agreement.
This opinion has been furnished to you in accordance with the
Agreement and may not be relied upon by any other person or for any other
purpose. This opinion is based on laws, rules, and regulations in effect
as of the date of this opinion. We express no opinion as to laws, rules,
and regulations other than these. This opinion is limited to those matters
expressly stated and no opinion should be inferred or implied beyond such
matters.
Very truly yours,
WARNER NORCROSS & JUDD LLP
By___________________________________
, a Partner
D-3
<PAGE>
EXHIBIT E
FORM OF DEFINITIVE EMPLOYMENT STATEMENT
E-1
<PAGE>
DEFINITIVE STATEMENT OF EMPLOYMENT
I am presently employed by the employer(s) named below in the
capacity indicated. Except as stated below, I have no oral or written
agreement, contract, appointment, engagement, relationship, or claim
relating to my employment as a director, officer, employee, independent
contractor, representative, agent, or otherwise (collectively, my
"Employment") with SJS BANCORP, INC., or any bank, company, or business
that controls, is controlled by, or is under common control with SJS
BANCORP, INC., (collectively, my "Employer"). Except as stated below, my
employment relationship with my Employer is "at will," meaning either I or
my Employer may terminate my Employment at any time with or without cause.
If there is any written agreement or contract pertaining to my Employment,
it is attached to this form.
The total amount of my compensation for last year as reported to
me by my Employer on IRS Form W-2 is stated below. My current
employment-related benefits (e.g., health, disability, and life insurance;
bonus and profit sharing; deferred income; retirement; automobile; clubs;
and other perquisites) are each listed below (IDENTIFY BUT DO NOT ATTACH
PLANS). There are no other benefits, during or after my employment,
except as described below.
<TABLE>
<CAPTION>
LAST YEAR'S W-2 WRITTEN CON-
NAME OF EMPLOYER CAPACITY(IES) AND TERMS COMPENSATION CURRENT BENEFITS TRACT?
(mark yes or no)
<S> <C> <C> <C> <C>
1. See Note 1 below No
Yes, attached
2. See Note 2 below No
Yes, attached
3. See Note 3 below No
Yes, attached
</TABLE>
NOTES 1 - 3 (ATTACH PAGES AS NECESSARY): MY CURRENT EMPLOYMENT BENEFITS
ARE:
1. - 3.
E-2
<PAGE>
This statement is given to and may be relied upon by SHORELINE
FINANCIAL CORPORATION and by my Employer. This statement of my Employment
is true, correct, and complete in all respects. This statement is made as
of ___________________________________, 19____. I will promptly advise you
of any material changes in this information.
___________________________________
Print or Type Name
___________________________________
Signature
E-3
<PAGE>
APPENDIX B
SECTION 262 OF THE DELAWARE LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of
this section with respect to such shares, who continuously holds such
shares through the effective date of the merger or consolidation, who has
otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to s 228 of this title shall be entitled to an appraisal
by the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As
used in this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest
of a member of a nonstock corporation; and the words "depository receipt"
mean a receipt or other instrument issued by a depository representing an
interest in one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation
to be effected pursuant to s 251 "(other than a merger effected pursuant to
subsection (g) of s 251)", s 252, s 254, s 257, s 258, s 263 or s 264 of
this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of s 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or
consolidation pursuant to ss 251, 252, 254, 257, 258, 263 and 264 of
this title to accept for such stock anything except:
B-1
<PAGE>
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in
respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation
will be either listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.
and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.,
b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under s 253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or (c)
hereof that appraisal rights are available for any or all of the
shares of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to demand the
B-2
<PAGE>
appraisal of his shares shall deliver to the corporation, before the
taking of the vote on the merger or consolidation, a written demand
for appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of
his shares. A proxy or vote against the merger or consolidation shall
not constitute such a demand. A stockholder electing to take such
action must do so by a separate written demand as herein provided.
Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with
this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to s 228
or 253 of this title, the surviving or resulting corporation, either
before the effective date of the merger or consolidation or within 10
days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation
and that appraisal rights are available for any or all of the shares
of the constituent corporation, and shall include in such notice a
copy of this section. The notice shall be sent by certified or
registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within
20 days after the date of mailing of the notice, demand in writing
from the surviving or resulting corporation the appraisal of his
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the
merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares. Such
B-3
<PAGE>
written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of
a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
B-4
<PAGE>
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the
surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation
be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the
stock (except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal
shall be filed within the time provided in subsection (e) of this section,
or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the
Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
B-5
<PAGE>
APPENDIX C
OPINION OF THE CHICAGO CORPORATION
<PAGE>
[LOGO]
208 South LaSalle Street
ABN-AMRO Chicago, Illinois 60604
Chicago Corporation (312) 855-7600
February ___, 1997
Board of Directors
SJS Bancorp, Inc.
301 State Street
St. Joseph, MI 49085
Members of the Board:
You have asked us to advise you with respect to the fairness to the
shareholders of SJS Bancorp, Inc. (the "Company"), from a financial point
of view, of the consideration to be received by such holders pursuant to
the terms of the Agreement and Plan of Merger, dated as of November 6,
1996, (the "Merger Agreement"), by and among the Company, Shoreline
Financial Corporation. ("Shoreline") and SJS Acquisition Corporation, a
wholly-owned subsidiary of Shoreline. The Merger Agreement provides that
all of the issued and outstanding shares of Common Stock, par value $0.01
per share (the "Common Stock"), of the Company will be converted into the
right to receive cash (the "Conversion") in the amount of $27.00 per share
(the "Consideration"), and for the subsequent merger of SJS Acquisition
Corporation with and into the Company (the "Merger" and together with the
Conversion, the "Transaction"). The Company will be the surviving
corporate entity in the Merger. Upon consummation of the Merger, the
Company will carry out its complete liquidation by merging with and into
Shoreline (then its parent corporation, with Shoreline being the surviving
corporation).
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and Shoreline.
In addition to the Merger Agreement and this Proxy Statement, we have also
reviewed certain other information, including financial forecasts for the
Company, provided to us by the Company, and have met with the Company's
management to discuss the business and prospects of the Company.
____________________
ABN AMRO Chicago Corporation ("AACC") is not a bank. Securities sold,
offered or recommended by AACC are not deposits, are not insured by the
Federal Deposit Insurance Corporation, are not guaranteed by or an
obligation or responsibility of ABN AMRO Bank N.V., or any other U.S. bank
or thrift institution and involve investment risks, including the possible
loss of principal.
<PAGE>
[LOGO]
ABN-AMRO
Chicago Corporation
Board of Directors
SJS Bancorp, Inc.
February __, 1997
Page 2
We have also considered certain financial and stock market data of the
Company, we compared that data with similar data for other publicly-held
companies which we deemed relevant, and we have considered the financial
terms of certain other business combinations which have recently been
effected. We also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria
which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have
relied on its being complete and accurate in all material respects. With
respect to the financial forecasts, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available
estimates and judgments of the Company's management as to the future
financial performance of the Company. In addition, we have not made an
independent evaluation or appraisal of the assets of the Company, nor have
we been furnished with any such evaluations or appraisals.
We have acted as financial advisor to the Company in connection with the
Transaction and will receive a fee for our services, including rendering
this opinion, a significant portion of which is contingent upon the
consummation of the Transaction.
ABN AMRO Chicago Corporation, as part of its investment banking business,
is continually engaged in the valuation of banks and bank holding companies
and thrifts and thrift holding companies in connection with mergers and
acquisitions as well as initial and secondary offerings of securities of
such companies and valuations for other purposes. ABN AMRO Chicago
Corporation is a member of all principal U.S. securities exchanges and may
from time to time purchase securities from, and sell securities to, the
Company or Shoreline and, either directly or through affiliates, may buy or
sell the equity securities of the Company or of Shoreline, as principal or
for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities.
<PAGE>
[LOGO]
ABN-AMRO
Chicago Corporation
Board of Directors
SJS Bancorp, Inc.
February __, 1997
Page 3
It is understood that this letter is for the benefit and use of the Board
of Directors of the Company in its consideration of the Transaction, and
may not be used for any other purpose or reproduced, disseminated, quoted
or referred to at any time, in any manner or for any purpose without our
prior written consent, which consent shall not be unreasonably withheld,
except that the Company is authorized to include this letter in its
entirety in the proxy materials contemplated by the Merger Agreement or to
meet other regulatory requirements. This letter does not constitute a
recommendation to any shareholder as to how such shareholder should vote on
the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be received by the shareholders of the
Company in the Transaction is fair to such shareholders from a financial
point of view.
Very truly yours,
ABN AMRO CHICAGO CORPORATION
<PAGE>
[LOGO]
ABN-AMRO 208 South LaSalle Street
Chicago Corporation Chicago, Illinois 60604
(312) 855-7600
CONSENT OF ABN AMRO CHICAGO CORPORATION
We hereby consent to the use of our opinion letter to the Board of
Directors of SJS Bancorp, Inc. included as an appendix to the Proxy
Statement relating to the proposed merger of SJS Bancorp, Inc. and SJS
Acquisition Corporation and to the references to our firm and such opinion
in such Proxy Statement. In giving such consent, we do not admit that we
come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, nor do we
thereby admit that we are experts with respect to any part of such
registration Statement within the meaning of the term "experts" as used in
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
ABN-AMRO Chicago Corporation
January __, 1997
____________________
ABN AMRO Chicago Corporation ("AACC") is not a bank. Securities sold,
offered or recommended by AACC are not deposits, are not insured by the
Federal Deposit Insurance Corporation, are not guaranteed by or an
obligation or responsibility of ABN AMRO Bank N.V., or any other U.S. bank
or thrift institution and involve investment risks, including the possible
loss of principal.
<PAGE>
APPENDIX D
AUDITED FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS
June 30, 1996
SJS BANCORP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
___________________________________________________________________________
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSET
Cash and due from financial institutions $ 3,116,085 $ 3,143,680
Interest-bearing demand deposits in other financial
institutions 14,832 371,500
------------ ------------
Total cash and cash equivalents 3,130,917 3,515,180
Interest-bearing deposits in other financial institutions 190,000 190,000
Mortgage-backed securities available for sale (Note 4) 26,831,702 15,185,815
Mortgage-backed securities held to maturity
(fair value: June 30, 1996 - $9,351,120; June 30, 1995 -
$21,168,925) (Note 4) 9,379,310 20,879,256
Equity securities available for sale (Note 3) 63,280 62,480
Securities available for sale 5,566,705
Securities held to maturity (fair value: June 30, 1996 -
$3,630,989; June 30, 1995 - $13,539,932) (Note 3) 3,667,929 13,965,413
Net loans (Notes 5 and 6) 98,861,649 71,817,876
Accrued interest receivable
Loans 735,897 545,710
Securities 124,703 242,094
Mortgage-backed securities 208,962 221,113
Federal Home Loan Bank stock 1,187,500 863,600
Premises and equipment (Note 7) 1,152,526 1,187,836
Other assets 795,564 836,300
------------ ------------
Total assets $151,896,644 $129,512,673
============ ============
D-1
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits (Note 8) $107,927,968 $106,293,639
Advance payments by borrowers for taxes and insurance 1,249,689 1,104,735
Federal Home Loan Bank advances (Note 9) 23,750,000 4,500,000
Other borrowings (Note 9) 1,356,934
Accrued interest payable on deposits 251,385 204,961
Other liabilities 450,282 392,125
------------ ------------
Total liabilities 134,986,258 112,495,460
Commitments and contingent liabilities (Note 13)
</TABLE>
___________________________________________________________________________
See accompanying notes to financial statements.
D-2
<PAGE>
SJS BANCORP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
___________________________________________________________________________
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Shareholders' equity (Notes 10, 11, 12 and 14)
Preferred stock, $.01 par value: 2,000,000 shares
authorized; none outstanding
Common stock, $.01 par value: 4,500,000 shares
authorized, 951,622 issued and outstanding 9,866 9,522
Additional paid-in capital 9,519,762 8,808,968
Retained earnings, substantially restricted 9,635,294 9,161,369
Net unrealized loss on securities available for sale,
net of tax of $257,903 and $26,943 for 1996 and 1995,
respectively (500,635) (52,302)
Net unrealized loss on securities held to maturity,
net of tax of $26,777 and $282,182 for 1996 and 1995,
respectively (51,979) (547,764)
Employee Stock Ownership Plan (ESOP) (unallocated shares) (322,140) (362,580)
Management Recognition Plan (MRP) (unearned shares) (675,532)
Treasury Stock (35,000 shares at cost) (704,250)
------------ ------------
Total shareholders' equity 16,910,386 17,017,213
------------ ------------
Total liabilities and shareholders' equity $151,896,644 $129,512,673
============ ============
</TABLE>
___________________________________________________________________________
See accompanying notes to financial statements.
D-3
<PAGE>
SJS BANCORP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1996, 1995 and 1994
___________________________________________________________________________
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 7,283,943 $5,160,307 $3,962,178
Interest on securities 732,025 801,336 544,876
Interest on mortgage-backed securities 2,183,733 2,270,439 2,457,088
Interest on mortgage-backed securities
(collateral for CMO borrowing) 630,025
Other interest income 228,147 256,081 228,182
----------- ---------- ----------
10,427,848 8,488,163 7,822,349
Interest expense
Interest on deposits (Note 8) 5,506,721 4,794,472 4,630,958
Interest on borrowings 957,807 198,144 685,210
----------- ---------- ----------
6,464,528 4,992,616 5,316,168
----------- ---------- ----------
NET INTEREST INCOME 3,963,320 3,495,547 2,506,181
Provision for loan losses (Note 6) 175,109 (38,000) (48,000)
----------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,788,211 3,533,547 2,554,181
Noninterest income
Fees and service charges 431,115 351,945 348,388
Gain on sale of loans (Note 5) 15,996 13,754 268,758
Gain (loss) on sale of securities and
mortgage-backed securities (Notes 3 and 4) (1,117) (6,863) 213,733
Other operating income 110,280 84,907 71,519
----------- ---------- ----------
556,274 443,743 902,398
Noninterest expense
Salaries and employee benefits (Note 10) 1,352,621 1,404,246 1,334,174
Occupancy expense 223,664 219,519 206,641
Furniture, fixtures and equipment expense 80,035 77,127 81,109
D-4
<PAGE>
Federal insurance premium 308,145 302,967 287,400
Data processing expense 310,580 270,867 276,023
Legal expense 117,480 48,130 28,560
Other operating expense 847,059 676,983 638,569
----------- ---------- ----------
3,239,584 2,999,839 2,852,476
----------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE
AND EXTRAORDINARY ITEM 1,104,901 977,451 604,103
Federal income tax expense (Note 14) 261,537 287,766 219,992
----------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 843,364 689,685 384,111
Debt extinguishment, net of tax of $158,330
(Note 9) (307,346)
----------- ---------- ----------
NET INCOME $ 843,364 $ 689,685 $ 76,765
=========== ========== ==========
EARNINGS PER SHARE (NOTE 1):
Primary $ .91 $ .38 N/A
=========== ========== ==========
Fully diluted $ .91 $ .38 N/A
=========== ========== ==========
</TABLE>
___________________________________________________________________________
See accompanying notes to financial statements.
D-5
<PAGE>
SJS BANCORP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
___________________________________________________________________________
<CAPTION>
ADDITIONAL NET UNREALIZED UNALLOCATED UNEARNED TOTAL
COMMON PAID-IN RETAINED GAIN (LOSS) ESOP MRP TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS ON SECURITIES SHARES SHARES STOCK EQUITY
----- ------- -------- ------------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1993 $8,394,919 $ 590,652 $ 8,985,571
Net income for the year
ended June 30, 1994 76,765 76,765
Change in net unrealized
gain (loss) on securities,
net of tax of $757,985
(Notes 3 and 4) (1,471,379) (1,471,379)
---------- ----------- -----------
BALANCE AT JUNE 30, 1994 8,471,684 (880,727) 7,590,957
Net income for the year
ended June 30, 1995 689,685 689,685
Sale of 952,200 shares
of common stock, net
of conversion costs
(Notes 2 and 10) $9,522 $8,803,608 $(380,880) 8,432,250
Shares committed to be
released under the ESOP 5,360 18,300 23,660
Change in net unrealized
gain (loss) on securities
net of tax of ($144,583)
(Notes 3 and 4) 280,661 280,661
------ ---------- ---------- ----------- --------- -----------
BALANCE AT JUNE 30, 1995 9,522 8,808,968 9,161,369 (600,066) (362,580) 17,017,213
Net income for the year
ended June 30, 1996 843,364 843,364
Shares granted under the MRP 344 675,188 $(675,532)
D-6
<PAGE>
Cash dividends - $.40 per
share (369,439) (369,439)
Shares committed to be
released under the ESOP 35,606 40,440 76,046
Acquisition of treasury
shares (at cost) $(704,250) (704,250)
Change in net unrealized
gain (loss) on securities
net of tax of ($24,445)
(Notes 3 and 4) 47,452 47,452
------ ---------- ---------- ----------- --------- --------- --------- -----------
BALANCE AT JUNE 30, 1996 $9,866 $9,519,762 $9,635,294 $ (552,614) $(322,140) $(675,532) $(704,250) $16,910,386
====== ========== ========== =========== ========= ========= ========= ===========
</TABLE>
___________________________________________________________________________
See accompanying notes to financial statements
D-7
<PAGE>
SJS BANCORP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1995 and 1994
___________________________________________________________________________
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 843,364 $ 689,685 $ 76,765
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 83,104 82,726 85,171
Amortization (185,360) 103,342 124,873
Provision for loan losses 175,109 (38,000) (48,000)
Deferred income taxes (56,276) (54,529) (168,782)
ESOP expense 76,046 23,660
Gain on sale of loans (15,996) (13,754) (268,758)
Loss (gain) on sale of securities and
mortgage-backed securities 1,117 6,863 (213,733)
Proceeds from sale of loans 5,871,163 2,470,729 22,600,111
Loans originated for sale (5,975,469) (2,602,887) (17,335,537)
Changes in assets and liabilities:
Deferred loan fees (112,713) (11,601) 2,776
Accrued interest receivable (60,646) (68,893) 76,397
Other assets (18,470) (10,567) 505,720
Accrued interest payable 46,424 65,277 (129,949)
Other liabilities 58,158 (446,649) (313,200)
------------ ------------ ------------
Net cash from operating activities 729,555 195,402 4,993,854
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in interest-bearing deposits
in other financial institutions 197,000
Purchases of equity securities (800)
Purchases of FHLB stock (323,900)
Purchases of securities available for sale (589,111)
Purchase of securities held to maturity (1,450,000) (2,249,883) (7,050,640)
Proceeds from sales of securities available for sale 700,000 588,271 1,532,781
Proceeds from calls and maturities of securities
held to maturity 5,127,652
Purchase of mortgage-backed securities
available for sale (7,761,908) (3,945,535) (14,169,456)
D-8
<PAGE>
Purchase of mortgage-backed securities
held to maturity (6,793,736) (974,820) (4,439,180)
Proceeds from sales of mortgage-backed
securities available for sale 10,833,312 4,974,391 14,954,801
Proceeds from sales of mortgage-backed
securities held to maturity in connection
with extinguishment of debt 5,643,146
Principal payments on mortgage-backed
securities 4,185,657 6,596,429 14,128,881
Loans purchased (500,000)
Loan originations and principal payments
on loans, net (26,485,867) (19,256,187) (7,252,017)
Net expenditures on foreclosed real estate (5,837)
Proceeds from sale of foreclosed real estate 96,875
Premises and equipment expenditures (47,794) (53,910) (38,881)
------------ ------------ ------------
Net cash from investing activities (22,426,346) (14,910,355) 3,506,435
</TABLE>
___________________________________________________________________________
See accompanying notes to financial statements.
D-9
<PAGE>
SJS BANCORP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1995 and 1994
___________________________________________________________________________
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 1,634,329 $ (2,553,450) $ 460,088
FHLB borrowing 22,250,000 5,000,000
Repayment of FHLB advances (3,000,000) (500,000)
Principal payments on long-term borrowings (7,032,909)
Net change in advance payments by borrowers 144,954 (198,228) (235,873)
Net change in other borrowings 1,356,934
Common stock issued 8,432,250
Dividends paid (369,439)
Treasury stock purchased (704,250)
------------ ------------ ------------
Net cash from financing activities 21,312,528 10,180,572 (6,808,694)
------------ ------------ ------------
Net change in cash and cash equivalents (384,263) (4,534,381) 1,691,595
Cash and cash equivalents at beginning of year 3,515,180 8,049,561 6,357,966
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,130,917 $ 3,515,180 $ 8,049,561
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 6,418,104 $ 4,927,339 $ 5,828,634
Income taxes 375,505 206,600 335,000
Transfer of mortgage-backed securities from
available for sale to held to maturity at fair
value (Note 4) 16,905,411
Transfer of securities from held to maturity
to available for sale at fair value (Note 4) 23,967,560
</TABLE>
___________________________________________________________________________
See accompanying notes to financial statements.
D-10
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: SJS Bancorp, Inc. (the "Corporation") was organized
as a thrift holding company in the State of Delaware during February 1995
to be the sole shareholder of SJS Federal Savings Bank, FSB (the "Bank").
The Bank is the sole shareholder of SJS Financial Corporation and SJS
Capital Corporation.
SJS Federal Savings Bank is a federally chartered savings bank
headquartered in St. Joseph, Michigan. The Bank attracts retail deposits
from the general public and invests those funds primarily in one- to four-
family residential mortgage loans and mortgage-backed securities. The
operations of SJS Financial Corporation consist of investing in the stock
of MIMLIC Life Insurance Company. See Note 9 for a description of the
operations of SJS Capital Corporation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The primary
estimates incorporated into the Corporation's financial statements which
are susceptible to change in the near term include the allowance for loan
losses and the determination and carrying value of certain financial
instruments.
CONCENTRATIONS OF CREDIT RISK: The Corporation grants mortgage and
installment loans to, and obtains deposits from, customers primarily in
Southwestern Michigan. Substantially all loans are secured by specific
items of collateral, primarily residential real estate and customer assets.
Other financial instruments which potentially subject the Corporation to
concentrations of credit risk include deposit accounts in other financial
institutions.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Corporation, its wholly-owned subsidiary, the Bank, and
the Bank's wholly-owned subsidiary, SJS Financial Corporation. All
significant intercompany transactions and balances are eliminated in
consolidation.
___________________________________________________________________________
(Continued)
D-11
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SECURITIES AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE: Securities
and mortgage-backed securities available for sale consist of those
securities which might be sold prior to maturity due to changes in interest
rates, prepayment risks, yield and availability of alternative investments,
liquidity needs or other factors. Securities and mortgage-backed
securities classified as available for sale are reported at their fair
value and the related unrealized holding gain or loss is reported, net of
related income tax effects, as a separate component of shareholders'
equity, until realized.
Premiums and discounts on securities available for sale are recognized in
interest income using the interest method over the estimated life of the
security based upon current prepayment speeds. The net investment in these
securities is adjusted, as estimated lives change, to the amount that would
have existed had the new effective yield been applied since the acquisition
of the securities. The securities are adjusted to the new balance with a
corresponding charge or credit to interest income. Gains and losses on the
sale of securities available for sale are determined using the specific
identification method.
SECURITIES AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY: Securities and
mortgage-backed securities for which the Corporation has the positive
intent and ability to hold to maturity are reported at cost, adjusted for
premiums and discounts that are recognized in interest income using the
interest method over the period to maturity.
Certain securities have been transferred from available for sale to held to
maturity. The unrealized gain or loss at the date of transfer is being
recognized in interest income using the interest method over the remaining
period to maturity. The unrealized gain or loss reported in equity is
being recognized in the same manner.
LOANS: Loans are stated at unpaid principal balances less the allowance
for loan losses and net deferred loan origination fees. Loans are placed
on nonaccrual states unless they are adequately collateralized and in the
process of collection.
___________________________________________________________________________
(Continued)
D-12
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INTEREST INCOME ON LOANS: Interest income on loans is accrued over the
term of the loans based upon the principal outstanding except where serious
doubt exists as to the collectibility of a loan, in which case the accrual
of interest is discontinued. Under SFAS No. 114, ACCOUNTING FOR CREDITORS
FOR IMPAIRMENT OF A LOAN, as amended by SFAS No. 118, the carrying values
of impaired loans are periodically adjusted to reflect cash payments,
revised estimates of future cash flows, and increases in the present value
of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while increases or decreases due
to changes in estimates of future payments and due to the passage of time
are reported as adjustments to the provision for loan losses.
For loans originated for portfolio, loan fees are deferred, net of certain
direct loan origination costs. The net amount deferred is reported in the
consolidated statements of financial condition as a reduction of loans and
is recognized as interest income over the contractual term of the loan
using the level-yield method.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full,
an allowance for loan losses is recorded. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the
risk of the loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a
level considered adequate to cover losses that are currently anticipated
based on past loss experience, general economic conditions, information
about specific borrower situations including their financial position and
collateral values, and other factors and estimates which are subject to
change over time. While management may periodically allocate portions of
the allowance for specific problem loan situations, the whole allowance is
available for any loan charge-offs that occur. A loan is charged-off
against the allowance by management as a loss when deemed uncollectible,
although collection efforts may continue and future recoveries may occur.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, Accounting for Creditors for
Impairment of a Loan (SFAS No. 114). SFAS No. 114, effective for the
Corporation beginning July 1, 1995, requires that impaired loans, as
___________________________________________________________________________
(Continued)
D-13
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
defined, be measured based on the present value of expected cash flows
discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of
collateral if the loan is collateral dependent. Under this standard, loans
considered to be impaired are reduced to the present value of expected
future cash flows or to the fair value of collateral, by allocating a
portion of the allowance for loan losses to such loans. If these
allocations cause the allowance for loan losses to require increase, such
increase is reported as an increase to the provision for loan losses. This
Statement did not have a material effect on the Corporation's consolidated
financial position or results of operations at the implementation date of
July 1, 1995.
Smaller-balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four family residences, residential construction
loans, student loans, home equity and second mortgage loans, and automobile
loans and are evaluated collectively for impairment. Commercial real
estate loans and other commercial loans are evaluated individually for
impairment. Normal loan evaluation procedures, as described in the second
preceding paragraph, are used to identify loans which must be evaluated for
impairment. In general, loans classified as doubtful or loss are
considered impaired while loans classified as substandard are individually
evaluated for impairment. Depending on the relative size of the credit
relationship, late or insufficient payments of 30 to 90 days will cause
management to reevaluate the credit under its normal loan evaluation
procedures. While the factors which identify a credit for consideration
for measurement of impairment, or nonaccrual, are similar, the measurement
considerations differ. A loan is impaired when the economic value
estimated to be received is less than the value implied in the original
credit agreement. A loan is placed in nonaccrual when payments are more
than 90 days past due unless the loan is adequately collateralized and in
the process of collection. Although impaired loan and nonaccrual loan
balances are measured differently, impaired loan disclosures under SFAS
Nos. 114 and 118 are not expected to differ significantly from nonaccrual
and renegotiated loan disclosures.
MORTGAGE BANKING ACTIVITIES: Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of cost or estimated
___________________________________________________________________________
(Continued)
D-14
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
aggregate market value. Net unrealized losses are recognized in a
valuation allowance by charges to income. Loan servicing fees are
recognized when received and the related costs are recognized when
incurred. The Bank sells mortgage loans into the secondary market at
market prices, which includes consideration for normal servicing fees.
STATEMENT OF CASH FLOWS: For the purpose of this statement, cash and cash
equivalents include cash on hand, demand balances with financial
institutions and short-term investments having original maturities of three
months or less. The Bank reports net cash flows from customer loan
transactions, deposit transactions and deposits made with other financial
institutions.
INCOME TAXES: Beginning July 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS
No. 109). The Corporation records income tax expense based on the amount
of taxes due on its tax return plus deferred taxes computed based on the
expected future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities, using enacted tax
rates, adjusted for allowances made for uncertainty regarding the
realization of net tax assets. The effect of the adoption of SFAS No. 109
as of July 1, 1993, was immaterial, and accordingly, no provision for the
cumulative effect of the accounting change was reflected in the 1994
consolidated statement of income.
DEFINED CONTRIBUTION BENEFIT PLAN: The Corporation maintains a defined
contribution money purchase pension plan that covers substantially all
employees. Contributions are based on a percentage of compensation
established on a discretionary basis. The Corporation's expense for the
plan was $69,398, $72,820 and $76,209 for the years ending June 30, 1996,
1995 and 1994, respectively. It is the Corporation's policy to fund
pension costs accrued.
EMPLOYEE STOCK OWNERSHIP PLAN: The cost of shares issued to the ESOP but
not yet allocated to participants is presented in the consolidated
statement of financial condition as a reduction of shareholders' equity.
Compensation expense is recorded based on the market price of the shares as
they are committed to be released for allocation to participant accounts.
___________________________________________________________________________
(Continued)
D-15
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The difference between the market price and the cost of shares committed to
be released is recorded as an adjustment to additional paid-in-capital.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are reflected as a reduction
of debt and accrued interest.
Shares are considered outstanding for earnings per share calculations as
they are committed to be released; unallocated shares are not considered
outstanding.
PREFERRED STOCK: The Corporation is authorized to issue preferred stock
from time to time in one or more series subject to applicable provisions of
law, and the Board of Directors is authorized to fix the designations,
powers, preferences and relative participating, optional and other special
rights of such shares, including voting rights (which could be multiple or
as a separate class) and conversion rights. In the event of a proposed
merger, tender offer or other attempt to gain control of the Corporation
that the Board does not approve, it might be possible for the Board to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede the completion of such a transaction. The
Board of Directors has no present plans for the issuance of any preferred
stock.
EARNINGS PER SHARE: Primary and fully earnings per share are computed by
dividing net income subsequent to conversion by the weighted average number
shares and common share equivalents which would arise from the exercise of
stock options (initial grant occurred in fiscal 1996) (Note 10). Net
income for the period from stock conversion on February 15, 1995 to
June 30, 1995 was $350,363.
The weighted average number of shares used in the primary and fully diluted
earnings per share computations were as follows:
___________________________________________________________________________
(Continued)
D-16
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
<TABLE>
<CAPTION>
. . . . . . . .Year ended June 30,. . . . . .
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Primary 924,674 915,027 Not applicable
Fully diluted 925,805 915,027 Not applicable
</TABLE>
RECLASSIFICATIONS: Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform with the 1996
presentation.
ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS: The Financial Accounting
Standards Board (FASB) has issued Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, (SFAS No. 121). The Statement
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable, and establishes criteria for evaluating recoverability.
The Statement also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount
or fair value less cost to sell, with certain exceptions. The Statement is
effective for fiscal years beginning after December 15, 1995. Management
does not expect the Statement to have a material impact on the consolidated
financial condition or results of operations of the Company.
The Financial Accounting Standards Board recently released Statement of
Financial Accounting Standards No. 122, ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS (SFAS No. 122). This Statement changes the accounting for mortgage
servicing rights retained by the loan originator. Under this Statement, if
the originator sells or securitizes mortgage loans and retains the related
servicing rights, the total cost of the mortgage loan is allocated between
the loan (without the servicing rights) and the servicing rights, based on
their relative fair values. Under current practice, all such costs are
assigned to the loan. The costs allocated to mortgage servicing rights
___________________________________________________________________________
(Continued)
D-17
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
will be recorded as a separate asset and be amortized in proportion to, and
over the life of, the net servicing income. The carrying value of the
mortgage servicing rights will be periodically evaluated for impairment.
The Corporation currently retains servicing on almost all loans originated
and sold into the secondary market. Accordingly, this Statement will apply
to most loan sales. The impact on the Corporation's results of operations
and financial position is not expected to be significant when adopted,
however, the impact will depend upon the volume of loans sold with
servicing retained, the cost of loans originated, the relative fair values
of loans and servicing rights at the point of sale, among other factors.
In general, the Statement will increase the amount of income recognized
when loans are sold and will reduce the amount of income recognized during
the servicing period.
This Statement is effective for the Corporation's loan sale transactions
for fiscal 1997. Retroactive application to servicing rights created prior
to adoption of the Statement is prohibited.
The FASB has issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensations (SFAS No. 123). This Statement
establishes a fair value based method of accounting for employee stock
options and similar equity instruments, such as warrants, and encourages
all companies to adopt that method of accounting for all of their employee
stock compensation plans. However, the Statement allows companies to
continue measuring compensation cost for such plans using accounting
guidance in place prior to SFAS No. 123. Companies that elect to remain
with the former method of accounting must make pro-forma disclosures of net
income and earnings per share as if the fair value method provided for in
SFAS No. 123 had been adopted. The accounting requirements of the
Statement are required for transactions entered into in fiscal years that
begin after December 15, 1995, although early adoption is permitted.
Disclosure requirements are effective for financial statements issued after
December 15, 1995 or the period in which the accounting requirements are
adopted if they are early adopted. Companies which elect to continue
measuring compensation costs under current guidance must present pro-forma
disclosures for awards granted in the first fiscal year beginning after
December 15, 1994, however that disclosure need not be made until financial
___________________________________________________________________________
(Continued)
D-18
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
statements for that fiscal year are presented for comparative purposes with
financial statements for a later fiscal year. Management has concluded
that the Corporation will not adopt the fair value accounting provisions of
SFAS No. 123 and will continue to apply its current method of accounting.
Accordingly, adoption of SFAS No. 123 will have no impact on the
Corporation's consolidated financial position or results of operations.
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP
On June 6, 1994, the Board of Directors of the Bank, subject to regulatory
approval and approval by the members of the Bank, unanimously adopted a
Plan of Conversion to convert from a federally chartered mutual savings
bank to a federally chartered stock savings bank with the concurrent
formation of the Corporation as the Bank's holding company. The conversion
was consummated on February 15, 1995 by amending the Bank's federal charter
and the sale of the holding company's common stock in an amount equal to
the pro forma market value of the Bank after giving effect to the
conversion. Subscriptions for the shares of the Corporation's common stock
were offered initially to tax-qualified employee plans and the Bank's
depositors, then to other members and directors, officers and employees of
the Bank. Proceeds of $8,432,250 were received from the sale of 952,200
common shares, after deduction of conversion costs of $708,870 and the
issuance of 38,088 shares for the ESOP in exchange for a note receivable
from the ESOP. Upon closing of the stock offering, the Corporation
purchased 100% of the common shares of the Bank. SJS Federal Savings Bank
is now a wholly-owned subsidiary of the Corporation. The conversion was an
internal reorganization with historical balances carried forward without
adjustment.
NOTE 3 - SECURITIES
The amortized cost and fair values of nonmortgage-backed securities at
June 30, 1996 and 1995 are as follows:
___________________________________________________________________________
(Continued)
D-19
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 3 - SECURITIES (Continued)
AVAILABLE FOR SALE
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
1996
- ----
U.S. Government agencies $ 5,868,074 $301,369 $ 5,566,705
Equity securities 63,280 63,280
----------- -------- -----------
$ 5,931,354 $301,369 $ 5,629,985
=========== ======== ===========
1995
- ----
Equity securities $ 62,480 $ 62,480
=========== ===========
HELD TO MATURITY
1996
- ----
U.S. Government agencies $ 3,667,929 $ 9,858 $ 46,798 $ 3,630,989
=========== ======= ======== ===========
1995
- ----
U.S. Government agencies $13,965,413 $23,692 $449,173 $13,539,932
=========== ======= ======== ===========
</TABLE>
___________________________________________________________________________
(Continued)
D-20
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 3 - SECURITIES (Continued)
The amortized cost and fair value of nonmortgage-backed securities at
June 30, 1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------ ----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 500,000 $ 500,000
Due after one year through
five years $4,868,334 $4,600,455 1,470,000 1,446,415
Due after five years through
ten years 999,740 966,250 1,247,758 1,236,638
Due after ten years 450,171 447,936
---------- ----------
$5,868,074 $5,566,705 $3,667,929 $3,630,989
========== ========== ========== ==========
Equity securities $ 63,280 $ 63,280
========== ==========
</TABLE>
At June 30, 1996, the Corporation had securities with a carrying value of
approximately $500,000 and fair value of $489,435 in various structured
debt securities issued by government-sponsored enterprises. All such
securities were classified as held to maturity. The Corporation's
investment objectives for purchase of these securities was similar to its
objectives for the purchase of other securities.
Proceeds from the sale of debt and equity securities during the years ended
June 30, 1996, 1995 and 1994 were $700,000, $588,271 and $1,532,781,
___________________________________________________________________________
(Continued)
D-21
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 3 - SECURITIES (Continued)
respectively. Gross gains of $626, $6,569 and $32,781, respectively, were
realized on these sales, with a loss of $2,973 realized during 1996. No
securities classified as held to maturity under SFAS No. 115 were sold
during fiscal 1996 or 1995.
NOTE 4 - MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities at June 30,
1996 and 1995 are as follows:
<TABLE>
AVAILABLE FOR SALE
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
1996
- ----
Collateralized mortgage obligations
FNMA $ 5,353,705 $ 4,810 $149,506 $ 5,209,009
FHLMC 8,473,185 8,234 155,632 8,325,787
----------- ------- -------- -----------
13,826,890 13,044 305,138 13,534,796
Mortgage-backed certificates
FNMA 7,719,975 33,010 107,380 7,645,605
FHLMC 3,253,905 18,230 65,444 3,206,691
GNMA 2,488,101 43,491 2,444,610
----------- ------- -------- -----------
13,461,981 51,240 216,315 13,296,906
----------- ------- -------- -----------
$27,288,871 $64,284 $521,453 $26,831,702
=========== ======= ======== ===========
D-22
<PAGE>
1995
- ----
Collateralized mortgage obligations
FNMA $ 1,692,272 $ 6,379 $ 28,743 $ 1,669,908
FHLMC 1,013,438 11,698 1,001,740
Other 155,698 726 156,424
----------- ------- -------- -----------
2,861,408 7,105 40,441 2,828,072
Mortgage-backed certificates
FNMA 4,468,214 54,226 22,446 4,499,994
FHLMC 5,748,125 11,794 86,733 5,673,186
GNMA 2,187,313 3,143 5,893 2,184,563
----------- ------- -------- -----------
12,403,652 69,163 115,072 12,357,743
----------- ------- -------- -----------
$15,265,060 $76,268 $155,513 $15,185,815
=========== ======= ======== ===========
</TABLE>
___________________________________________________________________________
(Continued)
D-23
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 4 - MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
HELD TO MATURITY
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
1996
- ----
Mortgage-backed securities
FNMA $ 2,528,820 $ 40,786 $13,545 $ 2,556,061
FHLMC 4,401,852 8,980 23,503 4,387,329
GNMA 2,448,638 40,908 2,407,730
----------- -------- ------- -----------
$ 9,379,310 $ 49,766 $77,956 $ 9,351,120
=========== ======== ======= ===========
1995
- ----
Mortgage-backed securities
FNMA $ 9,089,818 $189,949 $44,217 $ 9,235,550
FHLMC 9,823,537 164,226 30,259 9,957,504
GNMA 858,702 21,797 836,905
Other 1,107,199 33,767 2,000 1,138,966
----------- -------- ------- -----------
$20,879,256 $387,942 $98,273 $21,168,925
=========== ======== ======= ===========
</TABLE>
Because of their variable payments, asset-backed securities are not
reported by a specific maturity grouping.
Fixed-rate planned amortization class collateralized mortgage obligations
(CMO's) with a carrying value of $16,905,411, including unrealized loss,
were transferred on August 8, 1994 at fair value from available for sale to
held to maturity. Management has determined that these CMO's exhibit
___________________________________________________________________________
(Continued)
D-24
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 4 - MORTGAGE-BACKED SECURITIES (Continued)
characteristics which result in only a remote likelihood that regulatory
authorities would require classification of such securities as available
for sale. The net unrealized loss on these CMO's at the date of transfer
is being amortized into interest income over the remaining expected lives
of the individual securities.
Proceeds from the sale of mortgage-backed securities during the years ended
June 30, 1996, 1995 and 1994 were $10,833,312, $4,974,391 and $14,954,801,
respectively. Gross gains of $7,592, $16,419 and $201,536 and gross losses
of $6,362, $29,851 and $69,431 were realized on these sales.
As noted in Note 2, the Bank has converted from a mutual ownership to a
stock-based ownership. In completing the conversion, Bank management
simplified the Bank's business plan and thereby prepaid its long-term
borrowing and liquidated the related collateral. The long-term borrowing
was repaid in June of 1994 and the mortgage-backed securities serving as
collateral with a carrying value of $5,594,299 were sold. The
extinguishment and corresponding collateral sale are deemed to be isolated
transactions and unusual in nature for the Bank. Proceeds from the sale of
the securities were $5,643,146 with gross gains of $48,847.
In accordance with the FASB Special Report, A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities, securities held to maturity with a carrying value of
$24,369,673 and a fair value of $23,967,560 were transferred to the
available for sale classification on December 31, 1995. The transfers were
made to provide greater flexibility in managing liquidity and interest rate
risk.
NOTE 5 - LOANS
Loans as of June 30 are summarized as follows:
___________________________________________________________________________
(Continued)
D-25
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 5 - LOANS (Continued)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
First mortgage loans (principally conventional):
Secured by one-to-four family residences $70,034,958 $46,346,997
Secured by other properties 1,945,655 1,649,571
Construction loans 6,747,880 2,496,200
----------- -----------
78,728,493 50,492,768
Less:
Undisbursed portion of construction loans (4,029,792) (2,020,567)
Deferred fees and discounts (60,316) (173,028)
----------- -----------
Total first mortgage loans 74,638,385 48,299,173
Consumer and other loans:
Auto loans 16,117,610 16,117,695
Home equity 2,299,820 2,033,269
Other 6,451,925 5,926,393
----------- -----------
24,869,355 24,077,357
----------- -----------
99,507,740 72,376,530
Less allowance for loan losses (646,091) (558,654)
----------- -----------
$98,861,649 $71,817,876
=========== ===========
</TABLE>
The following summarizes the Bank's secondary mortgage market activities
for the years ended June 30:
___________________________________________________________________________
(Continued)
D-26
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 5 - LOANS (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Activity during the year:
Loans originated for resale, net of
principal paydowns $ 5,975,469 $ 2,602,887 $17,335,537
Proceeds from sales of loans
originated for resale 5,871,163 2,470,729 22,600,111
Gain on sales of loans originated
for resale 15,996 13,754 268,758
Loan servicing fees 125,900 127,396 130,503
Balances at June 30:
Loans held for sale 596,797 476,495 330,583
Loans serviced for others 46,604,281 48,235,552 51,295,742
Custodial escrow balances 410,421 532,363 671,198
</TABLE>
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance - July 1 $ 558,654 $571,952 $581,576
Provision charged (credited) to income 175,109 (38,000) (48,000)
Loans charged-off (125,690) (26,371) (18,860)
Recoveries 38,018 51,073 57,236
--------- -------- --------
Balance - June 30 $ 646,091 $558,654 $571,952
========= ======== ========
</TABLE>
___________________________________________________________________________
(Continued)
D-27
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 6 - ALLOWANCE FOR LOAN LOSSES (Continued)
During fiscal year 1996, no loans were classified as impaired.
Nonaccrual loans totaled approximately $310,530, $67,141 and $52,600 at
June 30, 1996, 1995 and 1994, respectively.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 384,278 $ 384,278
Buildings and improvements 1,634,166 1,631,005
Furniture and equipment 391,663 355,098
----------- -----------
2,410,107 2,370,381
Less accumulated depreciation (1,257,581) (1,182,545)
----------- -----------
$1,152,526 $1,187,836
=========== ===========
</TABLE>
NOTE 8 - DEPOSITS
Deposits at June 30 are summarized as follows:
___________________________________________________________________________
(Continued)
D-28
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 8 - DEPOSITS (Continued)
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE 1 9 9 6 1 9 9 5
RATE AT ------- -------
JUNE 30, 1996 AMOUNT % AMOUNT %
------------- ------ - ------ -
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
deposits $ 1,225,457 1.1% $ 2,118,053 2.0%
NOW accounts
and MMDAs 3.26% 13,905,208 12.9 13,855,074 13.0
Passbook and
statement savings 2.48 11,832,053 11.0 11,565,034 10.9
------------ ----- ------------ -----
26,962,718 25.0 27,538,161 25.9
IRAs, Keoghs, and
certificates of deposit
accounts:
2.00% to 3.99% 3.86 41,284 291,174 .3
4.00% to 5.99% 5.34 43,823,361 40.6 44,109,633 41.5
6.00% to 7.99% 6.45 36,897,267 34.2 34,102,375 32.1
8.00% to 9.99% 9.00 103,338 .1 152,296 .1
10.00% and higher 11.75 100,000 .1 100,000 .1
------------ ----- ------------ -----
80,965,250 75.0 78,755,478 74.1
------------ ----- ------------ -----
$107,927,968 100.0% $106,293,639 100.0%
============ ===== ============ =====
</TABLE>
The aggregate amount of certificates of deposit greater than $100,000 was
approximately $11,160,080 and $12,048,029 at June 30, 1996 and 1995,
respectively.
___________________________________________________________________________
(Continued)
D-29
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 8 - DEPOSITS (Continued)
At June 30, 1996, scheduled maturities FOR ALL of the Bank's certificates
of deposit, IRA and Keogh accounts are as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
2.00% to 3.99% $ 40,188 $ 1,097 $ 41,285
4.00% to 5.99% 36,086,298 $3,797,610 $2,273,207 $ 504,282 $1,101,963 $ 60,000 43,823,360
6.00% to 7.99% 26,700,690 3,037,792 2,118,958 4,658,274 82,579 298,974 36,897,267
8.00% to 9.99% 90,000 6,754 6,584 103,338
10.00% and higher 100,000 100,000
----------- ---------- ---------- ---------- ---------- -------- -----------
$62,917,176 $6,835,402 $4,492,165 $5,170,407 $1,184,542 $365,558 $80,965,250
=========== ========== ========== ========== ========== ======== ===========
</TABLE>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NOW accounts and MMDAs $ 456,178 $ 434,446 $ 402,806
Passbook and statement savings 280,768 301,416 328,091
Certificates of deposit, IRA and
Keogh accounts 4,769,775 4,058,610 3,900,061
---------- ---------- ----------
$5,506,721 $4,794,472 $4,630,958
========== ========== ==========
</TABLE>
Deposits accepted from related parties were $622,944 and $747,716 at June
30, 1996 and 1995, respectively.
___________________________________________________________________________
(Continued)
D-30
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 9 - BORROWINGS
FHLB ADVANCES
At June 30, 1996 and 1995, the Corporation had advances from the Federal
Home Loan Bank of Indianapolis totaling $23,750,000 and $4,500,000,
respectively, with variable and fixed interest rates ranging from 5.23% to
6.61%, respectively, as of June 30, 1996.
Maturities of advances outstanding at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 $ 3,650,000
1997 4,250,000
1998 8,050,000
2000 6,800,000
2001 1,000,000
-----------
$23,750,000
</TABLE>
The advances as of June 30, 1996 are collateralized by specific securities
with a carrying value of $28,505,243 and by Federal Home Loan Bank stock.
OTHER BORROWINGS
As of June 30, 1996, other borrowings consisted of a net overdraft balance
of $1,356,934 relative to one of the Bank's correspondent bank
relationships. Due to the nature of this relationship, it is not uncommon
for the accounts to fluctuate between net positive and negative balances.
COLLATERALIZED MORTGAGE OBLIGATION
SJS Capital Corporation was incorporated on November 15, 1988, as a
wholly-owned subsidiary of SJS Federal Savings Bank for the purpose of
issuing a Collateralized Mortgage Obligation (CMO). The CMO, dated October
20, 1988 was issued November 18, 1988 with a total par value of
___________________________________________________________________________
(Continued)
D-31
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 9 - BORROWINGS (Continued)
$20,800,000, original issue discount of $1,650,301 and issuance costs of
$307,322, resulting in net proceeds of $18,842,377.
In June 1994, the remaining CMO balance was extinguished and the
corresponding collateral was sold. Upon extinguishment, remaining
unamortized original issue discount of $278,413 and deferred debt issuance
costs of $104,104 were written off. Further, a premium of $83,159 was paid
upon extinguishment. The total of the unamortized original issue discount,
deferred debt issuance costs and premium upon extinguishment is disclosed
as an extraordinary item (net of the combined tax effect of $158,330) in
the consolidated statement of income.
NOTE 10 - STOCK BASED COMPENSATION PLANS
As part of the conversion transaction, the Corporation established an
employee stock ownership plan ("ESOP") for the benefit of substantially all
employees. The ESOP borrowed $380,880 from the Corporation and used those
funds to acquire 38,088 shares of the Corporation's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on
principal and interest repayments made by the ESOP on the loan from the
Corporation. The loan is secured by shares purchased with the loan
proceeds and will be repaid by the ESOP with funds from the Corporation's
discretionary contributions to the ESOP and earnings on ESOP assets.
However, in the event Corporation contributions exceed the minimum debt
service requirements, additional principal payments will be made. Upon
withdrawal from the plan, participants are entitled to require the
Corporation to repurchase the stock at fair value (referred to as the put
option). Withdrawn participants are entitled to exercise the put option
for a period of not more than 60 days following the date of distribution of
the stock.
___________________________________________________________________________
(Continued)
D-32
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 10 - STOCK BASED COMPENSATION PLANS (Continued)
During the years ended June 30, 1996 and 1995, 4,044 and 1,830 shares of
stock with a fair value of $18.80 and $12.93 per share were committed to be
released, resulting in ESOP compensation expense of $76,046 and $23,660,
respectively. Shares held by the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
------- -------
NUMBER OF FAIR VALUE NUMBER OF FAIR VALUE
SHARES OF SHARES SHARES OF SHARES
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Allocated to participants 5,874 $120,417 1,830 $ 26,993
Unallocated 32,214 660,387 36,258 534,806
------ ------
Total ESOP shares 38,088 38,088
====== ======
</TABLE>
A stock option and incentive plan (SOP) and management recognition plan
(MRP) were authorized by the Board of Directors at the February 28, 1996
meeting. The MRP is a restricted stock award plan. The SOP and MRP are
administered by a Committee of Directors of the Corporation. This
Committee selects recipients and terms of awards pursuant to the plans.
Total shares made available under the SOP and MRP plans were 95,220 and
38,088, respectively. The Committee has awarded under the SOP options to
purchase 79,509 shares of common stock at an exercise price of $19.625 per
share, which was the market price of the Corporation's stock on the date of
the award. At June 30, 1996, there were 15,711 shares reserved for future
grants. SOP options granted vest ratably over a five-year period with a
first scheduled vesting date of October 1, 1996. The term of the plan is
for a period of ten years with grants expiring on the date ten years after
the Grant Date. No compensation expense is being recognized in connection
with the issuance of the options.
The Corporation issued 34,422 shares of common stock for awards under the
___________________________________________________________________________
(Continued)
D-33
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 10 - STOCK BASED COMPENSATION PLANS (Continued)
MRP. MRP awards vest in ten equal annual installments, with the first
award to have vested on October 1, 1996 subject to the continuous
employment of the recipients and the Corporation's achievement of certain
performance standards as defined under the Plan. The performance criteria
for fiscal 1996 were not met, accordingly the first installment did not
vest. Compensation expense for the MRP is recognized on a prorata basis
over the vesting period of the awards. During the year ended June 30,
1996, no amount was charged to compensation expense for the MRP. The
unamortized unearned compensation value of the MRP is shown as a reduction
to shareholders' equity in the accompanying consolidated statements of
financial condition.
NOTE 11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON
RETAINED EARNINGS
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all "capital distributions" by savings institutions, including
cash dividends. The regulation establishes a three-tiered system of
restrictions, with the greatest flexibility afforded to thrifts which are
both well-capitalized and given favorable qualitative examination ratings
by the OTS. For example, a thrift which is given one of the two highest
examination ratings and has "capital" equal to its fully phased-in
regulatory capital requirements (a "tier 1 institution") could, after prior
notice but without the prior approval of the OTS, make capital
distributions in any calendar year that would reduce by up to one-half the
amount of its capital which exceeds its fully phased-in capital
requirement, as adjusted to reflect net income to date during the calendar
year. Other thrifts would be subject to more stringent procedural and
substantive requirements, the most restrictive being prior OTS approval of
any capital distribution. The Bank is a tier one institution.
SJS Federal Savings Bank established a liquidation account of $7,590,957
which was equal to its total net worth as of the date of the latest audited
balance sheet appearing in the final conversion prospectus. The
liquidation account is maintained for the benefit of eligible depositors
who continue to maintain their accounts at SJS Federal Savings Bank after
the conversion. The liquidation account is reduced annually to the extent
___________________________________________________________________________
(Continued)
D-34
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON
RETAINED EARNINGS (Continued)
that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest
in the liquidation account. In the event of a complete liquidation, each
eligible depositor will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. SJS Federal Savings Bank may
not pay dividends that would reduce shareholders' equity below the required
liquidation account balance.
Under the most restrictive of the dividend limitations described above at
June 30, 1996, approximately $4,096,000 is available to the Bank for the
payment of dividends to the holding company.
Savings institutions insured by the FDIC are required by FIRREA to meet
three regulatory capital requirements. If a requirement is not met,
regulatory authorities may take legal or administrative actions, including
restrictions on growth or operations or, in extreme cases, seizure.
Institutions not in compliance may apply for an exemption from the
requirements and submit a recapitalization or merger plan.
At June 30, 1996, under these capital requirements, the Bank had:
<TABLE>
<CAPTION>
ACTUAL REQUIREMENT EXCESS
------ ----------- ------
<S> <C> <C> <C>
Tangible capital 9.4% 1.5% 7.9%
Leverage capital 9.4 4.0 5.4
Risk-based capital 19.5 8.0 11.5
</TABLE>
The OTS has also issued, but not yet made effective, regulations which add
an interest rate risk component to risk-based capital. Institutions whose
interest rate risk exceeds 2%, as defined, are required to maintain
additional capital equal to one-half the difference between its measured
interest rate risk and 2%, multiplied by the market value of its assets.
___________________________________________________________________________
(Continued)
D-35
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON
RETAINED EARNINGS (Continued)
At June 30, 1996 the Bank would be required to provide additional risk-
based capital of $720,000 under these regulations.
The following is a reconciliation of the Bank's capital under generally
accepted accounting principles (GAAP) to regulatory capital at June 30,
1996 (000s omitted) and a presentation of excess regulatory capital.
<TABLE>
<CAPTION>
TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
<S> <C> <C> <C>
GAAP capital $ 13,687 $ 13,687 $13,687
Additional Capital items
Allowance for loan losses 430
Unrealized (gain) loss on securities 558 558 558
-------- -------- -------
Regulatory capital - computed 14,245 14,245 14,675
Minimum capital requirement 2,274 6,063 6,023
-------- -------- -------
Capital in excess of regulatory
minimum requirements $ 11,971 $ 8,182 $ 8,652
======== ======== =======
Regulatory asset base $151,578 $151,578 $75,291
======== ======== =======
</TABLE>
Accordingly, it is management's opinion that the capital requirements are
met.
The Qualified Thrift Lender (QTL) test requires that 65% of the Bank's
assets be maintained in housing-related finance and other specified assets.
If the QTL test is not met, limits are placed on growth, branching, new
investments, FHLB advances, and dividends, or the institution must convert
to a commercial bank charter. It is management's opinion that the Bank
meets the QTL test.
___________________________________________________________________________
(Continued)
D-36
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 12 - STOCK REPURCHASE PROGRAMS
During the year ended June 30, 1996, the Corporation received regulatory
approval to repurchase up to 9% or 85,698 shares of its common stock.
Through June 30,1996, 35,000 shares have been repurchased at an average
price of $20.12 and thereby the Corporation has remaining approval to
repurchase up to 50,698 additional shares. Approval to repurchase these
shares expires on March 1, 1997. Subsequent to June 30, 1996, and through
August 2, 1996, the Corporation has repurchased 34,000 additional shares.
Repurchased shares are treated as treasury shares and are available for
general corporate purposes, including issuance in connection with stock-
based compensation plans.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONTINGENCIES
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet financing needs of its
customers. These financial instruments include commitments to make loans,
commitments to purchase mortgage-backed certificates and unused lines of
credit. The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to make loans and purchase mortgage-backed certificates is
represented by the contractual amount of those instruments. The
Corporation follows the same credit policy to make such commitments as is
followed for those loans and investments recorded in the financial
statements.
As of June 30 the Corporation had the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to make loans $5,546,920 $3,184,913
Unused lines of credit 3,325,032 1,908,898
</TABLE>
___________________________________________________________________________
(Continued)
D-37
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONTINGENCIES (Continued)
As of June 30, 1996, all commitments to make loans were at fixed rates
ranging from 6.50% to 9.25% with a weighted average rate of 7.94%. The
terms on these commitments do not extend beyond 90 days. All unused lines
of credits were at variable rates adjusting monthly and quarterly. The
rates on these lines of credit ranged from 7.00% to 14.52% at June 30,
1996.
The Corporation does not anticipate any losses as a result of these
commitments. In addition, commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition
established in the contract. Collateral obtained upon exercise of the
commitment is determined using the Corporation's credit evaluation of the
borrower, and may include business assets, real estate and other items.
Since many commitments to make loans expire without being used, the amount
does not necessarily represent future cash commitments.
The Corporation has entered into employment agreements with four of its
officers. Under the terms of the agreements, certain events leading to
separation from the Corporation could result in cash payments aggregating
approximately $735,000 for the four individuals.
The Corporation and its subsidiary are subject to certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition
of these matters is not expected to have a material adverse effect on the
consolidated financial condition of the Corporation.
The deposits of savings associations such as SJS Federal Savings Bank are
presently insured by the Savings Association Insurance Fund (SAIF) which is
administered by the FDIC. A recapitalization plan for the SAIF under
consideration by Congress provides for a special assessment of up to 0.90%
of deposits to be imposed on all SAIF insured institutions to enable the
SAIF to achieve its required level of reserves. If the proposed assessment
of 0.70% was effected based on deposits as of March 31, 1995 (as proposed),
the special assessment would decrease net income and shareholder's equity
by approximately $494,000.
___________________________________________________________________________
(Continued)
D-38
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 14 - FEDERAL INCOME TAXES
The provision for federal taxes on income consists of the following for
year ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current income tax expense $317,813 $342,295 $ 230,444
Deferred income tax benefit (56,276) (54,529) (168,782)
-------- -------- ---------
Tax expense allocated to continuing operations 261,537 287,766 61,662
Extraordinary item - debt extinguishment (Note 9) 158,330
-------- -------- ---------
$261,537 $287,766 $ 219,992
======== ======== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30
are as follows:
___________________________________________________________________________
(Continued)
D-39
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 14 - FEDERAL INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 20,507 $ 58,830
Fixed assets 17,680 16,663
Accrued vacation 9,141 12,685
Unrealized loss on securities 284,681 309,125
Allowance for loan losses 69,051
Other 8,225 4,320
-------- --------
409,285 401,623
Deferred tax liabilities
Unrealized gain on loans held for sale 11,586 22,171
Allowance for loan losses 13,585
-------- --------
11,586 35,756
-------- --------
Net deferred tax assets $397,699 $365,867
======== ========
</TABLE>
No valuation allowance was provided on deferred tax assets.
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
___________________________________________________________________________
(Continued)
D-40
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 14 - FEDERAL INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
==== === ===
Tax expense at statutory rate $ 375,666 $332,333 $205,395
Change in adjusted base year tax reserve
for loan loss (132,600) (48,251)
Other 18,471 3,684 14,597
--------- -------- --------
$ 261,537 $287,766 $219,992
========= ======== ========
Effective tax rate 23.7% 29.4% 36.4%
===== ===== =====
</TABLE>
Retained earnings at June 30, 1996 and 1995 includes approximately
$2,330,000 and $1,940,000 for which no federal income tax liability has
been recorded. These amounts represent an allocation of income to bad debt
deductions for tax purposes alone. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments from carryback of
net operating losses would create income for tax purposes only, which would
be subject to current tax. The unrecorded deferred tax liability on the
above amount at June 30, 1996 and 1995 was approximately $792,200 and
$659,600, respectively.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
___________________________________________________________________________
(Continued)
D-41
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES
Fair values for securities are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar instruments.
FEDERAL HOME LOAN BANK STOCK
The carrying amount of this stock is a reasonable estimate of fair value.
LOANS
The fair value of fixed and variable rate loans is principally estimated by
discounting future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities, and using prepayment assumptions. The carrying
value of the allowance for loan losses is a reasonable estimate of fair
value.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
For these items, the carrying amount is a reasonable estimated of fair
value.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
future cash flows using the rates currently offered for deposits of similar
remaining maturities.
___________________________________________________________________________
(Continued)
D-42
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
FEDERAL HOME LOAN BANK ADVANCES
The fair values for these advances are determined by discounting cash flows
using rates currently offered for advances of similar remaining maturities.
OTHER BORROWINGS
Other borrowings consist of demand balances with banks and therefore the
fair value is the amount payable on demand at the reporting date.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of commitments was immaterial at the reporting date presented.
The estimated fair values of the Corporation's financial instruments are as
follows:
___________________________________________________________________________
(Continued)
D-43
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
1 9 9 6
-------
CARRYING FAIR
VALUE VALUE
----- -----
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 3,131 $ 3,131
Securities available for sale 32,462 32,462
Securities held to maturity 13,047 12,982
Federal Home Loan Bank stock 1,188 1,188
Loans, net 98,862 99,050
Accrued interest receivable 1,070 1,070
Financial liabilities
Deposits 107,928 108,161
Federal Home Loan Bank advances 23,750 23,444
Other Borrowings 1,357 1,357
Accrued interest payable 251 251
</TABLE>
___________________________________________________________________________
(Continued)
D-44
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of SJS Bancorp, Inc. is as follows as of
June 30:
<TABLE>
CONDENSED BALANCE SHEET
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 2,307,436 $ 3,275,234
Securities 533,367 805,932
Accrued interest receivable 3,148 5,305
Loans receivable from Employee Stock Ownership Plan 333,270 365,010
Investment in subsidiary bank 13,687,144 12,584,542
Other assets 52,111 2,000
----------- -----------
Total assets $16,916,476 17,038,023
=========== ===========
LIABILITIES
Other liabilities $ 6,090 $ 20,810
SHAREHOLDERS' EQUITY 16,910,386 17,017,213
----------- -----------
Total liabilities and shareholders' equity $16,916,476 17,038,023
=========== ===========
</TABLE>
D-45
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
CONDENSED STATEMENT OF INCOME
<CAPTION>
FEBRUARY 15, 1995
YEAR ENDED THROUGH
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
Interest and dividend income
Securities $ 46,695 $ 38,251
Loan to Employee Stock Ownership Plan 28,642 11,298
-------- --------
Total interest and dividend income 75,337 49,549
Noninterest income 12,935 9,090
Operating expenses 270,468 21,744
-------- --------
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES AND EQUITY
IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY BANK (182,196) 36,895
Federal income tax expense (benefit) (61,066) 11,597
-------- --------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY BANK (121,130) 25,298
Equity in undistributed earnings of subsidiary bank 964,494 325,065
-------- --------
NET INCOME $843,364 $350,363
======== ========
</TABLE>
D-46
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
___________________________________________________________________________
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<CAPTION>
FEBRUARY 15, 1995
YEAR ENDED THROUGH
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 843,364 $ 350,363
Adjustments to reconcile net income to
cash provided by operations
Equity in undistributed earnings of
subsidiary bank (964,494) (325,065)
Gain on sale of securities (9,090)
Amortization 4,583
Change in
Interest receivable 2,157 (5,305)
Other assets (50,055) (2,000)
Other liabilities (14,720) 18,112
----------- -----------
Net cash provided by operating activities (179,165) 27,015
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (1,821,815)
Proceeds from sales of securities available for sale 1,032,917
Principal on mortgage backed securities 267,818
Origination of loan receivable from ESOP (380,880)
Repayments on loan receivable from ESOP 31,740 15,870
Investment in subsidiary (14,502)
Purchase of stock in subsidiary bank (4,030,123)
----------- -----------
Net cash used in investing activities 285,056 (5,184,031)
D-47
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net
of conversion costs 8,432,250
Dividends paid (369,439)
Treasury stock purchased (704,250)
----------- -----------
Net cash from financing activities (1,073,689) 8,432,250
----------- -----------
Net change in cash (967,798) 3,275,234
Cash at beginning of period 3,275,234
----------- -----------
CASH AT END OF PERIOD $ 2,307,436 $ 3,275,234
=========== ===========
</TABLE>
D-48
<PAGE>
APPENDIX E
INTERIM FINANCIAL STATEMENTS AND MANAGEMENT'S
DISCUSSION AND ANALYSIS
September 30, 1996
<TABLE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<CAPTION>
SEPTEMBER 30, 1996 JUNE 30, 1996
------------------ -------------
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 2,552,587 $ 3,116,085
Interest-bearing demand deposits in other financial
institutions 612,525 14,832
------------ ------------
Total cash and cash equivalents 3,165,112 3,130,917
Interest-bearing deposits in other financial institutions 190,000 190,000
Mortgage-Backed Securities available for sale 22,528,017 26,831,702
Mortgage-Backed Securities held to maturity
(estimated fair value on September 30, 1996
$9,111,883; June 30, 1996 $9,351,120) 9,246,708 9,379,310
Equity securities available for sale 63,300 63,280
Investment securities available for sale 5,610,841 5,566,705
Investment securities held to maturity
(estimated fair value on September 30, 1996
$3,141,476; June 30, 1996 $3,630,989) 3,167,816 3,667,929
Federal Home Loan Bank Stock 1,187,500 1,187,500
Loans, net 103,542,113 98,861,649
Accrued interest receivable 1,031,631 1,069,562
Premises and equipment 1,138,279 1,152,526
Other assets 1,009,331 795,564
------------ ------------
Total assets $151,880,648 $151,896,644
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $109,817,011 $107,927,968
Federal Home Loan Bank Advances 23,369,719 23,750,000
Advance payments by borrowers for taxes and insurance 913,342 1,249,689
Accrued interest payable on deposits 221,910 251,385
Accrued expenses and other liabilities 1,741,178 1,807,216
------------ ------------
Total liabilities 136,063,160 134,986,258
E-1
<PAGE>
Common Stock 9,866 9,866
Paid in Surplus 9,529,806 9,519,762
Retained earnings, substantially restricted 9,170,065 9,635,294
Net unrealized gain (loss) on available-for-sale securities
(Applicable deferred income taxes on September 30,
1996 $241,030; June 30, 1996 $257,903) (467,882) (500,635)
Net unrealized gain (loss) on held-to-maturity securities
(Applicable deferred income taxes on September 30,
1996 $26,041; June 30, 1996 $26,777) (50,550) (51,979)
Employee Stock Ownership Plan (ESOP) (unallocated shares) (312,371) (322,140)
Management Recognition Plan (MRP) (unearned shares) (662,021) (675,532)
Treasury stock (69,000 shares at cost) (1,399,425) (704,250)
------------ ------------
Total Stockholders' Equity 15,817,488 16,910,386
------------ ------------
Total Liabilities and Stockholders' Equity $151,880,648 $151,896,644
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-2
<PAGE>
<TABLE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Interest income
Loans $2,085,395 $1,607,305
Investment securities 136,910 186,996
Mortgage-backed securities 509,273 555,604
Other interest income 53,540 59,863
---------- ----------
2,785,118 2,409,768
Interest Expenses
Deposits 1,386,090 1,355,589
Federal Home Loan Bank advances 356,790 101,721
---------- ----------
1,742,880 1,457,310
Net interest income 1,042,238 952,458
Provision for loan losses 55,000 2,000
---------- ----------
Net Interest Income after Provision for Loan Losses 987,238 950,458
---------- ----------
Non-interest Income
Service charges and other fees 102,056 103,768
Gain (loss) on sale of loans 1,963 (465)
Gain (loss) on sale of investment securities (17,160)
Other 39,965 30,855
---------- ----------
126,824 134,158
Non-interest expense
Compensation and benefits 404,649 336,571
Occupancy 53,626 55,590
Furniture, fixtures and equipment 23,133 18,351
Federal insurance premium 778,389 77,965
Data processing expense 74,905 75,133
Other operating expense 337,549 199,861
---------- ----------
1,672,251 763,471
E-3
<PAGE>
Income before federal income tax expense (benefit) (558,189) 321,145
Federal income tax expense (benefit) (189,962) 102,793
---------- ----------
Net income (loss) ($368,227) $ 218,352
========== ==========
Earnings (loss) per share:
Primarily ($.41) $ .24
===== ==========
Fully diluted ($.41) $ .24
===== ==========
Dividends per common share $ 0.11 $ .10
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
E-4
<PAGE>
<TABLE>
SJS BANCORP , INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
______________________________________________________________________________
<CAPTION>
ADDITIONAL NET UNREALIZED UNALLOCATED UNEARNED TOTAL
COMMON PAID-IN RETAINED GAIN (LOSS) ESOP MRP TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS ON SECURITIES SHARES SHARES STOCK EQUITY
----- ------- -------- ------------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $9,866 $9,519,762 $9,635,294 $(552,614) $(322,140) $(675,532) $ (704,250) $16,910,386
Net loss for the three months
ended September 30, 1996 (368,227) (368,227)
Cash dividends (97,002) (97,002)
Shares committed to be released
under the ESOP 10,044 9,769 19,813
Shares earned under the MRP 13,511 13,511
Acquisition of treasury shares
(at cost) (695,175) (695,175)
Change in net unrealized gain
(loss) on securities net of
tax 34,182 34,182
------ ---------- ---------- --------- --------- --------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1996 $9,866 $9,529,806 $9,170,065 $(518,432) $(312,371) $(662,021) $(1,399,425) $15,817,488
====== ========== ========== ========= ========= ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
E-5
<PAGE>
<TABLE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
_________________________________________________________________________
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (368,227) $ 218,352
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 22,079 20,011
Amortization 56,085 17,771
Provision for loan losses 55,000 2,000
ESOP and MRP expense 33,324 16,952
Gain on sale of loans (1,963) 465
Loss (gain) on sale of securities and
mortgage-backed securities 17,160 0
Proceeds from sale of loans 165,900 1,093,714
Loans originated for sale (113,377) (1,137,174)
Changes in assets and liabilities
Changes in assets (212,258) 138,807
Changes in liabilities (66,038) 1,734,977
----------- -----------
Net cash from operating activities (412,315) 2,105,875
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equity securities (280) 0
Proceeds from sales of equity securities 260 0
Purchase of securities held to maturity 0 (450,000)
Proceeds from calls and maturities of securities
held to maturity 500,156 0
Purchase of mortgage-backed securities
available for sale (2,492,546) (500,000)
Proceeds from sales of mortgage-backed
securities available for sale 5,607,540 0
Principal payments on investment securities 1,255,662 1,763,705
Loan originations and principal payments
on loans, net (4,796,688) (9,467,742)
Premises and equipment expenditures (7,832) (7,087)
----------- -----------
Net cash from investing activities 66,272 (8,661,124)
----------- -----------
E-6
<PAGE>
Net change in deposits $ 1,889,043 $ 277,962
FHLB borrowing 2,350,000 6,750,000
Repayment of FHLB advances (2,730,281) (500,000)
Net change in advance payments by borrowers (336,347) (390,657)
Dividends paid (97,002) 0
Treasury stock purchase (695,175) 0
----------- -----------
Net cash from financing activities 380,238 5,746,648
----------- -----------
Net change in cash and cash equivalents 34,195 (417,944)
Cash and cash equivalents at beginning of year 3,130,917 3,515,180
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,165,112 $ 3,097,236
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
E-7
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying consolidated financial statements include
the accounts of SJS Bancorp, Inc. (the "Company") and its wholly owned
subsidiary, SJS Federal Savings Bank (the "Bank"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
These interim financial statements are prepared without
audit and reflect all adjustments which, in the opinion of management,
are necessary to present fairly the consolidated financial position of
the Company at September 30, 1996, and its results of operations and
statement of cash flows for the periods presented. All such
adjustments are normal and recurring in nature. The results of the
periods presented are not necessarily representative of the results of
operations and cash flows which may be expected for the entire year.
The accompanying consolidated financial statements do not purport to
contain all the necessary financial disclosures required by generally
accepted accounting principles that might otherwise be necessary in
the circumstances and should be read in conjunction with the
consolidated financial statements and notes thereto of SJS Bancorp,
Inc. for the fiscal year ended June 30, 1996.
Earnings per Share:
Earnings per common share for the periods presented was
computed by dividing net income (loss) by the average number of shares
outstanding during the period. Employee and director stock options
are considered common stock equivalents. At September 30, 1996 the
Company had 31,237 unallocated ESOP shares which were excluded from
the weighted number of shares outstanding used to calculate the
earnings per common and common share equivalent. The weighted number
of shares outstanding for the calculation of primary earnings per
common and common equivalent share was 892,620 at September 30, 1996
and 916,575 at September 30, 1995. The weighted number of shares
outstanding for the calculation of fully-diluted earnings per share
was 896,876 at September 30, 1996 and 916,575 at September 30, 1995.
Net income (loss) was ($368,227) for the three months ended September
30,1996 and $218,352 for the three months ended September 30, 1995.
E-8
<PAGE>
NOTE 2 - IMPACT OF NEW ACCOUNTING STANDARDS
Several new accounting standards have been issued by the
Financial Accounting Standards Board that were adopted in fiscal 1996.
Statement of Financial Accounting Standards. No. 121, "Accounting for
the impairment of long-lived assets", requires a review of long-term
assets for impairment of recorded value and resulting write-downs if
value is impaired. Statement of Financial Accounting Standards No.
122, "Accounting for mortgage servicing rights", requires recognition
of an asset when servicing rights are retained on in-house originated
loans that are sold. Statement of Financial Accounting Standards No.
123, "Accounting for stock-based compensation", requires proforma
disclosure of the effect on net income of valuing future option grants
at estimated fair value of the option granted. These statements did
not have a material effect on the Company's financial position or
results of operations for the three months ended September 30, 1996.
NOTE 3 - LOANS
<TABLE>
<CAPTION>
Loans are classified as follows: SEPTEMBER 30, 1996 JUNE 30,1996
------------------ ------------
<S> <C> <C>
First mortgage loans (principally conventional):
Secured by one- to- four family residences $ 74,246,804 $ 70,034,958
Secured by other properties 2,042,660 1,945,655
Construction loans 6,100,125 6,747,880
------------ ------------
82,389,589 78,728,493
Less:
Undisbursed portion of construction loans (3,115,943) (4,029,792)
Deferred fees and costs (70,980) (60,319)
------------ ------------
Total first mortgage loans 79,202,666 74,638,385
Consumer and other loans:
Auto loans 15,890,743 16,117,610
Home equity 2,330,948 2,299,820
Other 6,810,936 6,451,925
------------ ------------
25,032,627 24,869,355
------------ ------------
104,235,293 99,507,740
Less allowance for loan losses (693,180) (646,091)
------------ ------------
$103,542,113 $ 98,861,649
============ ============
E-9
<PAGE>
Allowance for loan losses:
Activity in the allowance for losses is summarized as FISCAL 1996 FISCAL 1995
follows for the three months ended September 30: -1997 -1996
----- -----
Balance - July 1, $ 646,091 $ 558,654
Provisions charged to income 55,000 2,000
Loans charged-off (18,436) (7,927)
Recoveries 10,525 9,627
------------ ------------
Balance - September 30, $ 693,180 $ 562,354
============ ============
</TABLE>
The Company had no impaired loans at September 30, 1996 or September
30, 1995.
NOTE 4 - SAIF SPECIAL ASSESSMENT
On September 30, 1996, federal legislation was enacted that
requires the SAIF to be recapitalized with a one-time assessment on
virtually all SAIF-insured institutions, such as the Bank, equal to
65.7 basis points on SAIF-insured deposits maintained by those
institutions as of March 31, 1995. This SAIF assessment, which is to
be paid to the FDIC by November 27, 1996 is approximately $703,000 and
has been accrued by the Company at September 30, 1996.
As a result of the SAIF recapitalization, the FDIC has
proposed to amend its regulation concerning the insurance premiums
payable by SAIF-insured institutions. Effective October 1, 1996
through December 31, 1996, the FDIC has proposed that the SAIF
insurance premium for all SAIF-insured institutions that are required
to pay the Financing Corporation (FICO) obligation, such as the Bank,
be reduced to a range of 18 to 27 basis points from 23 to 31 basis
points per $100 of domestic deposits. The Bank currently qualifies
for the minimum SAIF insurance premium of 23 basis points. The FDIC
has also proposed to further reduce the SAIF insurance premium to a
range of 0 to 27 basis points per $100 of domestic deposits,
effective January 1, 1997. Management cannot predict whether or in
what form the FDIC's final regulation may be promulgated.
NOTE 5 - INCOME TAXES
The effective income tax (benefit) rate for the three month
period ended September 30, 1996 is (34%) compared to 32% for the
comparative period ended September 30, 1995. The income tax benefit
E-10
<PAGE>
is due to the net loss for the quarter ended September 30, 1996
resulting primarily from the aforementioned SAIF special assessment.
NOTE 6 - FHLB ADVANCES
At June 30, 1996 the company had advances from the Federal
Home Loan Bank of Indianapolis totaling $23,750,000 with variable and
fixed interest rates ranging from 5.23% to 6.61%, respectively. At
September 30, 1996, FHLB advances totaled $23,369,719 with variable
and fixed interest rates ranging from 5.23% to 6.61%, respectively.
Maturities of Advances outstanding are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 JUNE 30, 1996
------------------ -------------
<S> <C> <C> <C>
1996 $ 1,200,000 $ 3,650,000
1997 6,600,000 4,250,000
1998 8,050,000 8,050,000
2000 6,519,719 6,800,000
2001 1,000,000 1,000,000
----------- -----------
$23,369,719 $23,750,000
</TABLE>
These advances are collateralized by Federal Home Loan
Bank Stock and specific securities with a carrying value of
$28,447,107 for the period ended September 30, 1996 and $28,505,243
for the period ended June 30, 1996.
NOTE 7 - STOCK OPTION AND INCENTIVE PLAN ("SOP") AND MANAGEMENT
RECOGNITION PLAN ("MRP")
The Company's Board of Directors adopted a SOP and a MRP.
The SOP and MRP are administered by a Committee of directors of the
Company. This Committee selects recipients and terms of awards
pursuant to the Plan. Total shares available under the SOP and MRP
plans were 95,220 and 38,088, respectively. The Committee to-date has
awarded under the SOP options to purchase 79,509 shares of common
stock at an exercise price of $19.625 per share and awarded under the
MRP 34,422 shares of common stock. The SOP options granted vest
ratably over a five year period with a first award having vested
October 1, 1996. The MRP awards vest in ten equal annual
installments with the first award to have vested on October 1, 1996,
subject to the continuous employment of the recipients and the
achievement of specific performance criteria as defined under such
E-11
<PAGE>
plans. No MRP awards vested on October 1, 1996 as the Company did not
meet the performance criteria under the plan. Accordingly, no
compensation expense was recorded during the fiscal 1996 period in
connection with the MRP award. For the three month period ended
September 30, 1996, the company accrued $13,511 of compensation
expense in anticipation of meeting the performance criteria for the
October 1, 1997 vesting date.
NOTE 8 - STOCK REPURCHASE PROGRAMS
During 1996, SJS Bancorp, Inc. received regulatory
approval to repurchase up to 85,698 shares of its common stock.
Through September 30, 1996, 69,000 shares had been repurchased. The
repurchase approval expires on March 1, 1997.
Repurchased shares are treated as treasury shares and are
available for general company purposes, including issuance in
connection with stock based compensation plans.
E-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion compares the financial condition of
SJS and the Bank at September 30, 1996 to June 30, 1996 and the
results of operations for the three month period ended September 30,
1996, with the same period in 1995. This discussion should be read in
conjunction with the interim consolidated condensed financial
statements and notes thereto of SJS Bancorp for the quarters ended
September 30, 1996 included herein.
FINANCIAL CONDITION. Total assets of SJS decreased $15,996
from $151,896,644 at June 30, 1996 to $151,880,648 at September 30,
1996. Consistent with SJS's strategic plan's focus on asset mix, net
loans increased 4.7% from $98,861,649 at June 30, 1996 to
$103,542,113 at September 30, 1996. Growth of the mortgage and
consumer loan portfolios during this three month period amounted to
$4,727,553 and $163,272 respectively. The utilization of commissioned
loan originators and on going sales and marketing efforts increased
visibility and demand for SJS's mortgage loan products. During the
current three month period ended September 30, 1996, SJS funded loan
growth by decreasing its net holdings in mortgage-backed and
investment securities whereas in prior periods the primary source of
loan growth funding were Federal Home Loan Bank advances. SJS will
continue to focus on its business plan and continue to pursue
additional loan growth.
All securities, including mortgage backed, equity and
investment securities classified as available for sale and held to
maturity, decreased $4,892,244 from $45,508,926 at June 30, 1996 to
$40,616,682 as of September 30, 1996. This is consistent with SJS's
business plan, which emphasizes deployment of funds primarily into
loan growth.
Deposits increased $1,889,043 from $107,927,968 at June 30,
1996 to $109,817,011 at September 30, 1996, a 1.8% increase for the
three month period. Growth in the deposit area was focused on short
term certificates through competitive pricing in the market area.
Competition from other financial and non-financial entities continues
to limit deposit growth. The Bank will continue to offer competitive
interest rates on its products while concentrating marketing efforts
on establishing multiple deposit relationships with individual
customers.
Total stockholders' equity decreased by $1,092,898 from
$16,910,386 at June 30, 1996 to $15,817,488 at September 30, 1996.
This decrease was principally the result of the net loss of $368,227,
repurchases of common stock at a cost of $695,175 and cash dividends
of $97,002 paid on common stock.
E-13
<PAGE>
RESULTS OF OPERATIONS.
Net Income: SJS experienced a net loss for the three months
ended September 30, 1996 of $368,227 compared to net income of
$218,352 for the three months ended September 30, 1995, a decrease of
$586,589 over the prior three month period. The loss for the current
three month period ended September 30, 1996 was primarily the result
of $151,171 related to legal, accounting, shareholder and other
expenses associated with the pending sale of SJS discussed in Item 5
of Part II below, along with the one-time special SAIF
recapitalization assessment of $702,736. Excluding these two items,
net income for the current three month period would have amounted to
approximately $190,000.
Net Interest Income: Net interest income for the three
month period ended September 30, 1996 increased $89,780, or 9.4%
over the same three month period ended September 30, 1995. Interest
income increased $375,350, or 15.6% , from $2,409,768 for the three
month period ended September 30, 1995 to $2,765,116 for the same
period ended September 30, 1996. This improvement is attributable to
(a) net loan growth of $20.2 million from $81.4 million at September
30, 1995 to $103.5 million at September 30, 1996 and (b) a reduction
of $8.5 million during the same period in the lower yielding security
portfolio was redeployed into higher yielding loans. The interest
income increase was partially offset by a $285,570 increase in total
interest expense attributable to added higher FHLB advances and
deposits during the period. Management anticipates continued growth
in net interest income through increased earning assets, particularly
in the lending area. Earning asset growth, particularly loan growth,
will continue to be funded through various means including wholesale
and retail sources.
Provision (credit) for Loan Losses: SJS's provision for
loan losses increased by $53,000 for the three month period ended
September 30, 1996 compared to the three month period ended September
30, 1995. SJS's provision for the three month period ended September
30, 1996 was $55,000 compared to $2,000 for the three month period
ended September 30, 1995. Current charge-offs (net of current
recoveries) for the three months ended September 30, 1996 amounted to
$7,911. Continued strong loan growth of 4.7% for the three month
period ended September 30, 1996 totaling $4,680,464 was the primary
determinant of the loan loss provision of $55,000. Management
reviews the adequacy of the loan loss reserve and credit risk within
SJS's loan portfolio on a quarterly basis. As of September 30, 1996,
the allowance for loan losses totaled $693,180 representing .67% of
gross loans receivable and 338.6% of total non-performing loans. SJS
anticipates that as loan portfolio growth continues, provisions for
loan losses will continue to be made to maintain adequate loss
reserves.
E-14
<PAGE>
Non-Interest Income: Non-interest income for the three
month period ended September 30, 1996 decreased $7,334, or 5.5% , to
$126,824 from $134,158 for the prior three month period ended
September 30, 1995. The primary reason for the decrease was $17,160
in security investment losses, offset in part by gains on loan sales,
increased deposit service fees, and loan fee charges.
Non-interest expense: Non-interest expense increased
$908,780 for the three months ended September 30, 1996 to $1,672,251
from $763,471 for the three months ended September 30, 1995. The
major item of increase was from the one-time SAIF recapitalization
charge of $702,736. Additionally, $151,171 of expenses incurred in
the three months ended September 30, 1996 were due primarily to legal,
professional and accounting expenses associated with the pending sale
of SJS . Expenses relating to legal and accounting fees for the three
month period ended September 30, 1995 were $28,250.
Compensation and benefit expenses increased $68,076 from
$336,571 for the three month period ended September 30, 1995 to
$404,649 for the same period ended September 30, 1996 primarily due to
increases of $14,776 in directors fees and expenses, $16,372 of MRP
and ESOP expenses, $12,863 of employee compensation and $21,565 of
loan origination expenses.
Non-interest expense annualized as a percent of end-of-
period assets for the three month period ended September 30, 1996 was
1.10% compared to .56% for the three months ended September 30, 1995.
SJS does not expect a significant adverse impact on normal non-interest
expenditure levels as earning asset growth continues. SJS
does, however, expect additional expenditures relating to the
completion of the sale of SJS.
Income Tax Expense (Benefit): The effective income tax
(benefit) rate for the three month period ended September 30, 1996 is
(34%) compared to 32% for the period ended September 30, 1995. The tax
benefit is the result of the one-time SAIF assessment.
LIQUIDITY. SJS's principal sources of funds are deposits,
principal and interest payments on loans, interest-bearing deposits
and securities classified as available for sale. While scheduled loan
repayments and maturing investments are relatively predictable,
deposit flows and early loan prepayments are more influenced by
interest rates, general economic conditions and competition.
Additional sources of funds may be obtained from the Federal Home Loan
Bank (the "FHLB") of Indianapolis by utilizing an array of available
products to meet funding needs.
E-15
<PAGE>
The Bank is required to maintain minimum levels of liquid
assets as defined by Bank regulators. The required percentage has
varied from time to time based upon economic conditions and savings
flows and is currently 5% of net withdrawal savings deposits and
borrowings payable on demand or in one year or less during the
preceding calendar month. The Bank's liquidity ratio at September 30,
1996 was 4.74%, while average liquidity for the three month period
ended September 30, 1996 was 6.20%. The $4.9 million net reduction of
securities along with deposit growth of $1.9 million were used to fund
loan demand.
Although management believes that deposit flows will
continue to be a stable source of funds, ongoing use of wholesale
funding sources may be utilized to meet demand in accordance with
SJS's strategic plan. Wholesale funding sources may allow SJS to
obtain a lower cost of funds and create a more efficient liability
match to the asset being funded.
CAPITAL RESOURCES. The Bank is subject to three capital to
asset requirements in accordance with OTS regulations. The following
table is a summary of the Bank's regulatory capital requirements
versus actual capital at September 30, 1996:
CAPITAL REQUIREMENTS:
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS
AMOUNT/PERCENT AMOUNT/PERCENT AMOUNT/PERCENT
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible $13,985 9.22% $2,275 1.50% $11,710 7.72%
Core Leverage Capital 13,985 9.22% 6,067 4.00% 7,918 5.22%
Risk-Based Capital 14,462 18.72% 6,180 8.00% 8,282 10.72%
</TABLE>
E-16
<PAGE>
[FRONT]
SJS BANCORP, INC.
P R O X Y 301 STATE STREET
ST. JOSEPH, MICHIGAN 49085
SPECIAL MEETING OF STOCKHOLDERS - [DATE]
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS. IF THIS PROXY
IS PROPERLY EXECUTED AND DELIVERED, THE SHARES REPRESENTED BY THIS PROXY
WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES WILL
BE VOTED FOR ADOPTION OF THE AGREEMENT AND PLAN OF MERGER BETWEEN SJS AND
SHORELINE FINANCIAL CORPORATION. THE SHARES REPRESENTED BY THIS PROXY WILL
BE VOTED IN THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS THAT MAY
COME BEFORE THE MEETING OR ANY ADJOURNMENT OF THE MEETING.
1. Adoption of the Agreement and Plan of Merger
[ ] FOR [ ] AGAINST [ ] ABSTAIN
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE FOR ADOPTION OF THE AGREEMENT AND PLAN OF MERGER
IMPORTANT! - PLEASE DATE AND SIGN THE OTHER SIDE
<PAGE>
[BACK]
The undersigned shareholder appoints the Board of Directors
with the power to appoint its substitute, attorneys and proxies to
represent the stockholder and to vote and act, with respect to all shares
that the stockholder would be entitled to vote at the special meeting of
stockholders of SJS Bancorp, Inc. referred to above and at any
adjournment of that meeting, on all matters that come before the meeting.
Please sign exactly as your name appears
on this proxy. If signing for estates,
trusts or corporations, title or
capacity should be stated. IF SHARES
ARE HELD JOINTLY, EACH HOLDER SHOULD
SIGN.
X_______________________________________
Signature
X_______________________________________
Signature if held jointly
Dated: ___________________________, 1997
